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    Hec Ohlin Theory

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    Pavithra PRabhu
    1) The modern theory of international trade, also known as the Heckscher-Ohlin theory, was developed by Swedish economists Heckscher and Ohlin to explain the causes of trade between countries. 2) The theory argues that differences in factors of production, like capital and labor, between countries leads to differences in the prices of those factors and ultimately the prices of goods, causing trade. 3) Countries will export goods that make intensive use of their abundant and cheaper factors, and import goods that make intensive use of their scarce and more expensive factors.

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    Hec Ohlin Theory

    Uploaded by

    Pavithra PRabhu
    186 views13 pages
    1) The modern theory of international trade, also known as the Heckscher-Ohlin theory, was developed by Swedish economists Heckscher and Ohlin to explain the causes of trade between countries. 2) The theory argues that differences in factors of production, like capital and labor, between countries leads to differences in the prices of those factors and ultimately the prices of goods, causing trade. 3) Countries will export goods that make intensive use of their abundant and cheaper factors, and import goods that make intensive use of their scarce and more expensive factors.

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    1) The modern theory of international trade, also known as the Heckscher-Ohlin theory, was developed by Swedish economists Heckscher and Ohlin to explain the causes of trade between countries. 2) The theory argues that differences in factors of production, like capital and labor, between countries leads to differences in the prices of those factors and ultimately the prices of goods, causing trade. 3) Countries will export goods that make intensive use of their abundant and cheaper factors, and import goods that make intensive use of their scarce and more expensive factors.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    186 views13 pages

    Hec Ohlin Theory

    Uploaded by

    Pavithra PRabhu
    1) The modern theory of international trade, also known as the Heckscher-Ohlin theory, was developed by Swedish economists Heckscher and Ohlin to explain the causes of trade between countries. 2) The theory argues that differences in factors of production, like capital and labor, between countries leads to differences in the prices of those factors and ultimately the prices of goods, causing trade. 3) Countries will export goods that make intensive use of their abundant and cheaper factors, and import goods that make intensive use of their scarce and more expensive factors.

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    of 13

    MODERN THEORY OF INTERNATIONAL

    TRADE
    Modern Theory or Heckscher-Ohlin Theory of
    International Trade:

    Modern theory of International Trade was


    propounded by Swedish economist Heckscher in an
    article published in 1919. It was further improved
    upon by his disciple Bertil Ohlin in a research paper
    published in 1924 and later in his book “ International
    and Inter-regional Trade”. This theory does not
    contradict Comparative Cost Theory of international
    trade.
    ASSUMPTIONS OF THE HECKSCHER-OHLIN
    THEORY
    ❑ Heckscher-Ohlin theory is based on the following assumption :
    1) This theory relates to two countries, two commodities and the two factors. It is
    therefore, called 2x2x2 model.
    2) There is same production function for each commodity in two countries.
    3) Factor are mobile within the country but immobile between two countries.
    4) There is perfect competition in all markets. As a result:(a) all factors are fully
    employed,(b)factors get their reward in accordance with their marginal
    productivity, and (c) prices of the commodities are equal to their marginal
    productivity.
    5) No restriction is imposed on the exchanged of goods , i.e. free trade exists between
    two countries.
    6) Consumers’ tastes and preferences are identical in two countries.
    7) Technique of production employed in two countries is the same.
    8) There is lack of transport costs. Factor endowments are different in two countries.
    9) Goods can be classified on the basis of factor intensity, such as capital-intensive
    goods and labour-intensive goods etc.
    10) Production function of all goods is homogeneous of the first degree. It means that
    output will be doubled if all factors of production are doubled.
    Explanation of the Theory:
    ❑ According to Ohlin “International trade is a special case of inter-regional trade".
    Difference in factor endowments is the main cause of international trade along with inter-
    regional trade.
    Heckscher cites the following causes for difference in comparative costs:
    (i) Difference in factor Endowments, and
    (ii) Difference in factor Intensities.
    ❑ According to Heckscher-Ohlin theory of international trade, the immediate cause of
    international trade is the difference in relative commodities prices.
    1. The cause of difference in the relative prices of the goods is the difference in the amount of
    factor endowments, like capital and labour, between the two countries.
    2. As a result, there is difference in the relative demand and supply of factors, these difference
    cause difference in the prices of the factors.
    3. It is due to difference in factor prices that difference in the relative prices of the commodities
    takes place and it is this difference that constitutes the main cause of international trade.
    Abundance or scarcity of factor of Heckscher-Ohlin has been explain on the basis of
    two criteria. (i) price criterion and (ii) physical criterion.
    • (i) Prices criterion of factor Abundance or Scarcity:
    Price criterion of factor abundance or scarcity means that a country,
    where capital is relatively cheap and labour relatively dear, will be called
    capital abundant country, even if the quality of capital in that country
    is relatively less.
    On the contrary, if capital is relatively dear and labour relatively cheap,
    such a country will be called capital scarce country, even if the quality
    of capital in such a country is relatively more.
    Diagrammatic Illustration:
    Let us take Germany and India as two trading countries. It is assumed
    that Germany is a capital-intensive country and India is a labour-
    intensive country. The capital is cheaper in Germany in relation to
    labour; and labour is cheaper in India in relation to capital. This can be
    expressed in term of the following equation:As shown in figure.(1)
    Germany India
    (Pk/PL) < (Pk/PL)
    (Here, Pk=Price of capital; PL= price of labour.)
    (ii) Physical criterion of factor abundance or Scarcity:
    Physical criterion of factor abundance or scarcity means that if
    in a country capital ratio is greater than labour as against another
    country, then it will be called capital-intensive country. Likewise , if in a
    country labour ratio is greater than capital as against another country,
    then it will be called labour-intensive country.
    Diagrammatic Illustration:
    According to Heckscher-Ohlin whether two countries, say Germany
    and India are capital-intensive or labour-intensive depends on the fulfilment
    of the following condition:
    Germany India
    (KG/LG) > (KI/LI)
    (Here, KG=Quantity of capital in Germany; LG= Quantity of labour in
    Germany; KI= Quantity of capital in India; LI=Quantity of labour in India)
    Superiority of Ohlin’s Theory or comparison between classical
    Theory and Modern Theory:
    Ohlin’s theory does not contradict classical theory rather it is a clear and
    modified version of it. Superiority of this theory is evident from the
    following:
    Basis of classical theory is the difference of comparative costs in
    different countries. Basis of modern theory is to explain the cause of
    difference in comparative costs.
    a) Classical theory is based on labour theory of value which is
    unrealistic. Ohlin’s theory is based on money cost which is more
    realistic.
    b) Classical theory treats labour alone as the most important factor of
    production while Ohlin treats both labour and capital as important
    factor of production.
    c) Classical theory is a theory of partial equilibrium because it studies
    labour theory of value alone, but Ohlin has based his theory on
    general equilibrium of value.
    CRITICISM
    1) Partial Equilibrium analysis
    2) Unrealistic Assumptions
    3) Leontief’s Paradox
    4) Static Theory

    5) Factors are not homogeneous


    6) Production Techniques are not Homogeneous
    7) Illogical Argument of the Determination of goods’ prices
    8) Limited Explanation
    9) Contradictory conclusions

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