Explain the modern theory of international trade. how is it an improvement over the classical theory
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1. No difference among internal and international trade
According to the Classical economists, there is a need for a separate theory of international trade because of the differences between internal and international trade.
But according to Ohlin, there is no need for a separate theory of international trade, as fundamental principle of both is same.
2. More variables
As against Ricardian Theory which is based on two countries, two commodities and one factor, Ohlin's Modern theory incorporates two countries two commodities and two factors.
3. Comparative cost theory
According to the classical theory, the principle of comparative costs is a special feature of international trade.
According to Ohlin, the principle of comparative cost is applicable to all trade; whether internal or international.
4. Cost difference is expressed in terms of money
Superiority of H.O. theory lies in the fact that it calculates the cost differences in terms of money. Ricardo explains the difference in terms of labour theory of value of which is full of defects and impracticable. Trade which involves exchange of goods and services has been carried in terms of money. H.O. theory renders the cause of the trade easy to understand.
5. Supply of factors of production considered
The main cause of the international trade is the difference in factor supplies between the countries. Each country differs in factor endowments i.e. in their abundance or scarcity. Difference in supply, given the demand, brings the difference in cost of factor and finally, the difference in commodity prices. In Ricardian theory, difference in factor (labour) efficiency is recognized but difference in factor supply is ignored. H.O. theory, therefore provides a better explanation of price difference of factors through the difference is their supplies.
According to the Classical economists, there is a need for a separate theory of international trade because of the differences between internal and international trade.
But according to Ohlin, there is no need for a separate theory of international trade, as fundamental principle of both is same.
2. More variables
As against Ricardian Theory which is based on two countries, two commodities and one factor, Ohlin's Modern theory incorporates two countries two commodities and two factors.
3. Comparative cost theory
According to the classical theory, the principle of comparative costs is a special feature of international trade.
According to Ohlin, the principle of comparative cost is applicable to all trade; whether internal or international.
4. Cost difference is expressed in terms of money
Superiority of H.O. theory lies in the fact that it calculates the cost differences in terms of money. Ricardo explains the difference in terms of labour theory of value of which is full of defects and impracticable. Trade which involves exchange of goods and services has been carried in terms of money. H.O. theory renders the cause of the trade easy to understand.
5. Supply of factors of production considered
The main cause of the international trade is the difference in factor supplies between the countries. Each country differs in factor endowments i.e. in their abundance or scarcity. Difference in supply, given the demand, brings the difference in cost of factor and finally, the difference in commodity prices. In Ricardian theory, difference in factor (labour) efficiency is recognized but difference in factor supply is ignored. H.O. theory, therefore provides a better explanation of price difference of factors through the difference is their supplies.
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Explanation:
As against Ricardian Theory which is based on two countries, two commodities and one factor, Ohlin's Modern theory incorporates two countries two commodities and two factors. 3. Comparative cost theory. According to the classical theory, the principle of comparative costs is a special feature of international trade.
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