Heckscher- ohlin theory Of
INT. trade.
INTERNATIONAL TRADETopic-2
modern theories of int. trade
Intro-
Modern theory of int trade given by Heckscher and
Ohlin..
2*2*2 model.
Perfect competition prevails in the market.
Taste and demand function for different goods are
identical in both country.
Factor endowment in two countries constant and
relative endowment of two factors are disproportion
in both country..
Acc to H-O difference in commodity prices arises because
of the difference in factor endowment(supply) in the
country.
H-O use comparative cost principle to find cause of
difference in cost to
Relative factor endowment and
Relative factor intensities.
This theory is also known as factor proportion theory
and factor intensity theory.
Factor intensity means the relative proportion in which two factors
L&K are combined.
Country which is rich in labour will export labour
intensive good, and
Which is rich in capital will export capital intensive
goods.
If the consumption pattern in both countries are identical
then the income elasticity for each commodity equal to
unity.
If demand condition are different then the assumption
Capital abundant country export k intensive good vice
versa can not be possible
H-O theory is General eqm theory.
H-O theory is based on CES production function.
Factor proportion or factor endowment determine the
specialization in export.
Factor intensity do not reversible…ie steel is K intensive
in both country and cloth is L intensity in both country.
If this condition is not fulfills then H-O Theory
breakdown.
Then Leontief paradox will Apply in one of the two
country’s
Leontief paradox means- factor intensity are reversible.
Which means cloth is L intensive in country A and K
intensive in B.
Similarly- Steel is L intensive commodity in A but K
intensive in B.
Acc. To Leontief – U.S.A is k-abundant country, yet it is
specialization in labour intensive commodity.
Acc. To H-o int. trade will bring incomplete and partial
equalization of price of factor.
Classical v/s h-o theoryH-o theory classical theory
H-O theory is based on general
theory of value.
Classical theory is based on
Labour theory of value.
H-0 deal with 2 factors.L&K. Deal with only one factor-L only.
There is qualitative difference
in labour.
There is quantitative difference
in factor proportion.
Factor portion and intensity
lead to complete specialization
in export production.
Comparative advantage may or
may not lead to specialization in
export production.
Neo h-o theory.
Given by R.E.Falvey in 1981.
Based on intra-industry trade.
Intra-industry is a situation in which same product is
exchange bw two countries.
Classical , neo-classical (H-O) based on inter-industry
trade.
Four important theories Of
INT. trade.
INTERNATIONAL TRADETopic-3
Factor price equalization , stopler-
samuelson model, Metzler paradox and
learner symmetry theorem.
4.other theories of international trade
1.Factor price
equalization
2.Stopler-
samuelson
theorem.
3.Metzler
paradox
4.Lerner
symmetry
theorem