INTERNATIONAL Topic-2 Heckscher- ohlin theory Of INT. trade. modern theories of int. trade Intro-

Modern theory of int trade given by Heckscher and Ohlin.. 2*2*2 model.

Perfect competition prevails in the market. Taste and demand function for different goods are identical in both country.

Factor endowment in two countries constant and relative endowment of two factors are disproportion in both country.. Acc to H-O difference in commodity prices arises because of the difference in factor endowment(supply) in the country.

H-O use comparative cost principle to find cause of difference in cost to Relative factor endowment and Relative factor intensities. This theory is also known as factor proportion theory and factor intensity theory.

Factor intensity means the relative proportion in which two factors L&K are combined. Country which is rich in labour will labour intensive good, and Which is rich in will export capital intensive goods.

If the consumption pattern in both countries are identical then the income elasticity for each commodity equal to unity.

If demand condition are different then the assumption Capital abundant country export k intensive good vice versa can not be possible H-O theory is General eqm theory. H-O theory is based on CES production function.

Factor proportion or factor endowment determine the specialization in export. Factor intensity do not reversible…ie steel is K intensive in both country and cloth is L intensity in both country. If this condition is not fulfills then H-O Theory breakdown. Then Leontief will Apply in one of the two country’s Leontief paradox means- factor intensity are reversible.

Which means cloth is L intensive in country A and K intensive in B.

Similarly- Steel is L intensive commodity in A but K intensive in B. Acc. To Leontief – U.S.A is k-abundant country, yet it is specialization in labour intensive commodity.

Acc. To H-o int. trade will bring incomplete and partial equalization of price of factor. Classical v/s h-o theory H-o theory classical theory

H-O theory is based on general Classical theory is based on theory of value. Labour theory of value.

H-0 deal with 2 factors.L&K. Deal with only one factor-L only.

There is quantitative difference There is qualitative difference in factor proportion. in labour.

Factor portion and intensity may or lead to complete specialization may not lead to specialization in in export production. export production. Neo h-o theory.

Given by R.E.Falvey in 1981.

Based on intra-industry trade.

Intra-industry is a situation in which same product is exchange bw two countries.

Classical , neo-classical (H-O) based on inter-industry trade. Topic-3 Four important theories Of INT. trade. Factor price equalization , stopler- samuelson model, and learner symmetry theorem. 4.other theories of international trade

1.Factor price 3.Metzler equalization paradox

4.Lerner 2.Stopler- symmetry samuelson theorem theorem.