Heckscher-Ohlin Theory and Factors of Trade
Explore the Heckscher-Ohlin theory in international trade, focusing on factors like factor endowments, trade determinants, and essential conditions for trade between regions. Learn about factor abundance, factor intensity, and common assumptions underlying this economic model.
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Presentation Transcript
Dr. R. Jasmine Stanly Mary Assistant Professor Of Economics Sarah Tucker College Subject: International Trade
Other Names Modern Theory Factor Endowments General Equilibrium Factor Proportions
What are factor endowments? Factors availablefor production combination of these resources Relationship between ends(wants) and scarce means (resources)which have alternative Samuelson). uses (prof.
Main Cause Of Trade Between Region Differences In Prices Of Commodities Relative Factor Endowments Factor Prices
Main determinant Pattern Of Production Specialization Trade Among Regions Relative Availability Of Factor Endowment Economic development Social and demographic issues Entrepreneurial skills and freedom Geographical features
Assumptions Two-by-two-by-two Model Perfect Competition In Commodity As Well As Factor Markets Full Employment Of Resources Factor Intensities Are Non Reversible No Transport Cost Free And Unrestricted Trade No Change In Technology Constant Return To Scale
Essential For Trade Between Two Regions The relative scarcity of factors Relative commodity prices The shortage of supply in relation to demand
Factor abundance Factor abundance relates to available factors in large supply and is usually meaningful only in relative terms, compared to demand and/or to supply at another place or time.
Factor intensity Factor intensity is the relative importance of one factor versus other in production in an industry, usually compared across industries. (Glossary of international economics)
Factor Abundance In Terms Of Factor Prices Country A is abundant in capital (if capital is relatively cheap in country a) Thus country A will produce and export the capital intensive goods Country B is abundant in labour (if labour is relatively cheap in country b) Thus country B will produce and export the labour intensive goods
Factor Abundance In Physical Term A country is relatively capital abundant if it is endowed with a higher proportion of capital and labour than the other country
H-O Theory Superiority Over The Classical Theory International trade a special case General equilibrium theory Two factors of production Differences in factor supplies Relative prices of factors Relative productivities of factors Differences in factor endowments Complete specialization
Criticisms Criticised Two-by-two-by-two Model Ohlin model is static in nature Factors not homogeneous Production techniques not homogeneous Taste and demand patterns not identical No constant returns Transport costs influence trade Leontief paradox has falsified the theory
Conclusion Factor endowments are an important determinant in production and affects trade patterns in different countries The theoretical and empirical literature on factor endowments conform this. The literature survey is very useful for drawing up research methods and basis for arguments and comparisons for research purposes.
