Question

Critically examine the modern theory of international trade​

Answer 1

Answer:

Just as individuals specialize in economic activity in which they have compara­tive advantages, similarly countries specialize in the production of certain commodities in which they have comparative advantage on the basis of factor endowments.

Just as differences in individual capabilities are the cause of exchange between individuals, similarly differences in factor prices is the cause of international trade. Bertil Ohlin thus extends the analysis which is applicable to a single market to the determination of values internationally i.e. exchange between different countries.

Thus, Ohlin observes “International trade is but a special case of inter-local or inter-regional trade.” Hence, according to Ohlin, there is no need to have separate theory of international trade. He says that the same fundamental principle holds good of all trade, whether it is internal trade or international trade. The classical theory of comparative cost is based on the assumption of comparative immobility of the factors of production as between different countries. But Ohlin points out that this immobility is to be found even in different regions of the same country.

According to Ohlin, the immediate cause of international trade is the difference in commodity prices which in turn is due to the differences in factor prices. Goods are purchased because it cheaper to buy them from outside the country.

The establishment of the rate of exchange between the two countries facilitates the comparison between the commodity prices prevailing in the two countries. Thus, in Ohlin’s opinion there are no fundamental differences but only quantitative differences between inter-regional and international trade. Ohlin’s theory represents a departure from the classical theory and marks a great improvement on it.