Question

Discuss in details the hecksher ohlin model of international trade and state it's assumptions.

Answer 1

The Heckscher – Ohlin’s Theory of International Trade with its Assumption!

The classical comparative cost theory did not satisfactorily explain why comparative costs of producing various commodities differ as between different countries. The new theory propounded by Heckscher and Ohlin went deeper into the underlying forces which cause differences in compara­tive costs.

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   

This new theory is therefore-called Heckseher-Ohlin theory of international trade. Since there is wide agreement among modern economists about the explanation of international trade offered by Heckscher and Ohlin this theory is also called modern theory of international trade. Further, since this theory is based on general equilibrium analysis of price determination, this is also known as General Equilibrium Theory of International Trade.

It is worthwhile to note that, contrary to the viewpoint of classical economists, Ohlin asserts that there does not exist any basic difference between the domestic (inter-regional) trade and inter­national trade. Indeed, according to him, international trade is only a special case of inter-regional trade.

Thus, Ohlin asserts that it is not the cost of transport which distinguishes international trade from domestic trade, for transport cost is present in the domestic inter-regional trade. Trade because currencies of different countries are related to each other through foreign exchange rates which determine the value or purchasing power of different currencies

Ohlin, therefore, regards different nations as mere regions separated from each other by national frontiers, different languages and customs, etc. But these differences are not such that prevent the occurrence of trade between na­tions. He, therefore, asserts that general theory of value which can be applied to explain inter­regional trade can also be applied equally well to explain international trade.

According to general equilibrium theory of value, relative prices of commodious are deter­mined by demand for and supply of them. In the long-run equilibrium under conditions of perfect competition, relative prices of commodities, as determined by demand and supply, are equal to average cost of production.

The cost of production of a commodity, as is well-known, depends upon the prices paid for the factors of production employed in the production of that commodity. Factor prices in turn determine the incomes of the factor owners and hence the demand for goods.

Thus there is mutual inter-dependence between prices of commodities and prices of factors and the ex­change of goods and factors between different individuals in a region or country. This is how general equilibrium theory of value explains prices of commodities and factors between different individu­als in a region or a country.

However, according to Ohlin, the classical analysis presumes it to apply to a single market in a country and ignores the space factor whose introduction is crucial for expla­nation of trade between regions. The factors which explain the trade between different regions also explain the trade between different nations or countries as well.

Answer 2

Answer:

Heckscher-Ohlin theory, in economics, a theory of comparative advantage in international trade according to which countries in which capital is relatively plentiful and labour relatively scarce will tend to export capital-intensive products and import labour-intensive products, while countries in which labour is ...