This article Covers the following:
1. Introduction (Concept of Heckscher Ohlin Theory or modern theory of international trade).
2. Assumption of H.O theory.
3.Types of Factor Abundance.
4. Explain with help of figure.
5.Criticism.
6. Heckscher Ohlin theory is superior over classical theory.
1. Introduction:
Eli Heckscher and Bertin Ohlin in 1938 criticised the classical and neo-classical theory of international trade and formulated the general equilibrium theory or factor endowment or factor production theory of international trade. It also known as modern theory of international trade.
This theory states that the main determinant of the pattern of production and trade among regions is the relative availability of factor supplies. It is incontrovertible that different countries that have different factor endowment and factor supplies, some countries rich in capital and some are rich in labour. Thus the Heckscher Ohlin theory state that countries that are rich in capital will export and produce capital intensive goods or commodities and countries that are rich in labour will export and produce labour intensive goods or commodities.
2. Assumption of H.O Theory:
The Heckscher-Ohlin theory is based on the following assumption-
(i) There are two countries, two commodities and two factors of production (2×2×2 model).
(ii) Perfect competition prevails in both factor and product market.
(iii) There is full employment of resources.
(iv) Factor intensities are non reversible.
(v) There is free and unrestricted trade between the countries.
(vi) There is absence of transport cost.
(viii) Factors are mobile with in the country but immobile between the countries.
Based on these assumptions Heckscher Ohlin theory postulate that the immediate case of international trade is the difference in relative commodity prices. In Heckscher Ohlin theory factor abundance can be defined in terms of two criterion-
3. Types of Factor Abundance:
(i) Physical criterion
(ii) Price criterion
K'A/LA>K'B/LB Where K', L' are fixed amount of capital and labour.
Similarly, the relative scarcity of labour in physical terms in country A can be expressed as- L'A/KA<L'B/KB
For country B, relative labour abundance can be expressed as -
L'B/KB> L'A/KA
And capital scarcity in country B is expressed as-
K'B/LB<K'A/LA
From the above condition Heckscher Ohlin theory state that the country A will produce produce and export capital intensive commodity and country B will export labour intensive commodity.
PKA/PLA<PKB/PLB and country B is labour abundant
if PLB/PKB<PLA/PKA
Thus country A will export capital intensive good or commodity and B will export labour intensive good or commodity. This can be illustrated with the help of following figure-
In the above figure AB is the factor price line for country A and A¹B¹ is the factor price line for country B. As the slope of AB is greater than that of A¹B¹ capital is relatively cheap in country A and labour is relatively cheap in country B. It shows that
PKA/PLA<PKB/PLB
In the figure AB is tangent to the isoquant D at point R. It means that country A can produce certain number of units of Y by employing OR units of capital and OL units of labour. Again A²B² price line tangent to D at point S. It mean country B can produce some level of Y by employing OK¹ units of capital and OL¹ units of labour. Thus Y is more capital intensive in country A than B.
Similarly, at point R¹ to produce certain number of X country A need OK² unit of capital and OL² unit of labour. But country B need OK³ unit of capital and OL³ unit of labour to produce some unit of X at point S¹. Thus country 'B' is more labour intensive than country 'A'.
The Heckscher Ohlin theory has been criticised on the following grounds---
(i) It assumes perfect competition in the both market but in real life this is not found.
(ii) Ohlin has been criticised for presenting two by two by two model because as he points and it can be extended to many regions many commodities and many factors.
(iii) Like classical theory this model is also static in nature.
(iv) The assumption of constant return to scale is also not realistic
(v) This theory does not consider transport costs in trade between two countries.
Despite these criticism, this theory of international trade is definitely an important over the classical theory.
6.Explain Why Heckscher Ohlin theory is superior over classical theory?
Though both the classical theory and modern theory of international trade explain about the cause of international trade but the modern theory has been able to explain it more clearly following are the main grounds. On which modern theory of international trade makes an important over the classical one-
(i) The Heckscher Ohlin theory is superior to the classical theory in that it regards international trade as a special case of inter-regional trade as distinct from the classical theory which consider international trade totally different from domestic trade.
(ii) Modern theory explains the basis of international trade in terms of realistic general theory of value but classical theory depends on unrealistic labour theory of value.
(iii) The Heckscher Ohlin model takes two factors (labour, capital) as against the one factor (labour) of the classical model and it's thus superior to the later.
(iv) The classical theory failed to explain the cause of comparative difference in costs H.O provided a cause of comparted difference in costs i.e. different factor endowment.
(v) The H.O model is based differences in factor endowments in different countries as against the quality of one factor labour in classical theory.
(vi) The Heckscher Ohlin theory is realistic because it is based on the relative prices of factors which in turn influence the relative prices of goods which the Ricardian theory consider relative price of goods only.
(vii) Classical theory include gains from trade which related to welfare theory while the H.O model is positive theory because this is scientific and concentrates on the basis of trade.
(viii) In case of classical theory if in future, labour becomes equally efficient in both countries there will be no trade between them. But this is not happen in case of H.O theory.
(ix) The classical theory is based on the difference in the production of specified commodities between two trading countries. But the H.O theory gain prominences to differences in their production functions.
(x) Classical theory neglects the demand factors and fails to intergrade the theories of values and trade but H.O theory success to intergrade both theories.
It is clear from the discussion that the Heckscher Ohlin theorem is superior to classical theory.
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