Suppose two commodities cloth and wheat are produced in two countries, India and U. In such a situation, the input-output co-efficient in production functions will remain unchanged. Thus the capital-abundant country will export the capital-intensive good since the price will be temporarily higher in the other country. Unlike the Ricardian model, however, neither country will necessarily specialize in production of its export good. Also, if steel production is capital intensive, then it implies that clothing production must be labor-intensive relative to steel. The country with many workers but little capital, on the other hand, can produce many pairs of jeans but few cell phones. Since in the real world, above conditions are not fulfilled, complete factor price equalisation does not take place.
From this viewpoint, the latter theory is more specific and realistic. Each country exports the product the country is most suited to produce in exchange for products it is less suited to produce. Second, Heckscher-Ohlin theory removes the difference between international trade and inter-regional trade, for the factors determining the two are the same. The model shows us how comparative advantage is explained somewhat by the relative abundance of certain resources, such as land, labour or capital. But what is the fundamental cause of the commodity price differences remained unanswered in the classical theory. Even from this angle, the H-O theory is an improvement upon the classical theory.
In this case, trade may benefit both countries involved. Instead the assumption is useful that it enables us to see precisely how differences in resource endowments is sufficient to cause trade and it shows what impacts will arise entirely due to these differences. One country has more need for hired labour forces than another, for example, because their local production demands it. It will be observed from Figure 44. It is this ratio or proportion of one factor to another that gives the model its generic name: the Factor Proportions Model. Review of Economic Dynamics, 13 3 , 487-513. The neglect of technological change in H-O theory makes this model quite inconsistent with actual reality.
The country that has a lot of capital but few workers can produce many cell phones but few pairs of jeans because cell phones are capital intensive and jeans are labor intensive. The standard H-O model begins by expanding the number of factors of production from one to two. Many years later, in 1977,Bertil Ohlin was awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his contribution to the theory of international trade, based on the work he did with Heckscher. In fact, the Heckscher-Ohlin approach supplements the traditional approach in a powerful manner. Factor prices differ because endowments i. We shall explain below in detail these two types of gains.
Thank you so much for the article. Most importantly, the magnification effect allows one to analyze the effects of price changes on real wages and real rents earned by workers and capital owners. These goods are called labor intensive. It is worth emphasizing here a fundamental distinction between the H-O model and the Ricardian model. It will be seen from Fig. When as a result of foreign trade, a country moves from a lower indifference curve to a higher one, it implies that the welfare of the people has increased. From cakes to a gold medal Bertil Ohlin was born in 1899.
They explained that it is differences in factor endowments of different countries and different factor-proportions needed for producing different commodities that account for difference in comparative costs. The pattern of demand is different in the two countries. On account of factor immobility among different countries, he felt the need for a separate theory of international trade. It clearly shows that machine is a capital- intensive and cloth is a labour-intensive commodity, throughout the length of isoquants M and C except of course at the point of intersection R. The ethologists theory concentrates on… 1003 Words 5 Pages Melitz.
According to Heckscher-Ohlin theorem, with same factor endowments cost-ratio of producing the two commodities and hence the commodity price ratio would be the same. Dynamic Gains from Trade: International Trade and Economic Growth: We have seen above in the discussion of comparative cost theory that specialisation followed by international trade makes it possible for the countries to have more of both commodities than before. These social indifference curves represent the demands for the two goods, or, in other words, the scale of preferences between the two goods of the society. Still other commodities require relatively more land than capital and labour and are therefore called land-intensive commodities. So classical approach fails to integrate the theories of value and trade.
Therefore, in absence of trade of commodities, factor prices would not tend to the become equal in the different countries. According to the Stolper-Samuelson theorem, under the assumptions of constant returns to scale and perfect competition, an increase in relative price of a good will result in an increase in return to that factor of production, which is being used intensively in the production of that good and a decrease in return to the other factor of production that is being used less intensively. The H-O theory was clearly wrong in overlooking these factors. This assumption is not valid. Thus, Heckscher-Ohlin theory does not contradict and supplant the comparative cost theory but supplements it by offering sufficiently satisfactory explanation of what causes differences in comparative costs. It will be seen from Fig.
In other words, national welfare will rise for both countries when they move to free trade. He also noted that, when one country is rich in iron, for example. If international trade leads a country to specialize in producing goods that require lots of workers and little capital, such a specialization increases wages which benefits the workers but decreases the income of the capital owners. They differ if one country, for example, has many machines capital but few workers, while another country has a lot of workers but few machines. The Heckscher-Ohlin theory brought about a successful integration between the theories of value and trade. Briefly stated it says that an increase in a country's endowment of a factor will cause an increase in output of the good which uses that factor intensively, and a decrease in the output of the other good. In other words, the U.
Differences in preferences or demands for goods: Against Hecksher-Ohlin theorem, it has also been pointed out that differences in tastes and preferences for goods or, to put it in other words, differences in pattern of demand also give rise to trade between the countries. If the demand conditions are different in two countries, the conclusion that capital-abundant countries will export capital-intensive commodity and vice-versa cannot be sustained. High performing economies have industrialized not via imports substitutions but via exports of manufactured goods. As a result of trade India has also gained as she has reached a higher community indifference curve. Thus a country A which has a relative abundance of capital and relative scarcity of labour will have a comparative advantage in specialising in the production of capital-intensive commodities and in return will import labour-intensive goods.