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