Heckscher Ohlins (Ho) Modern Theory Of International Trade

Introduction To Heckscher Ohlin's H-O Theory ↓

The Modern Theory of international merchandise has been advocated yesteryear Bertil Ohlin. Ohlin has drawn his ideas from Heckscher's General Equilibrium Analysis. Hence it is equally good known equally Heckscher Ohlin (HO) Model / Theorem / Theory.

According to Bertil Ohlin, merchandise arises due to the differences inward the relative prices of dissimilar goods inward dissimilar countries. The divergence inward commodity cost is due to the divergence inward constituent prices (i.e. costs). Factor prices differ because endowments (i.e. uppercase as well as labour) differ inward countries. Hence, merchandise occurs because dissimilar countries direct maintain dissimilar constituent endowments.

The Heckscher Ohlin theorem states that countries which are rich inward labour volition export labour intensive goods as well as countries which are rich inward uppercase volition export uppercase intensive goods.

Assumptions of Heckscher Ohlin's H-O Theory ↓

Heckscher-Ohlin's theory explains the modern approach to international merchandise on the footing of next assumptions :-

1. There are 2 countries involved.
2. Each province has 2 factors (labour as well as capital).
3. Each province attain 2 commodities or goods (labour intensive as well as uppercase intensive).
4. There is perfect contest inward both commodity as well as constituent markets.
5. All production functions are homogeneous of the commencement grade i.e. production business office is land of written report to constant returns to scale.
6. Factors are freely mobile inside a province but immobile betwixt countries.
7. Two countries differ inward constituent supply.
8. Each commodity differs inward constituent intensity.
9. The production business office remains the same inward dissimilar countries for the same commodity. For e.g. If commodity A requires to a greater extent than uppercase inward 1 province as well as so same is the instance inward other country.
10. There is total work of resources inward both countries as well as need are identical inward both countries.
11. Trade is gratis i.e. at that topographic point are no merchandise restrictions inward the cast of tariffs or non-tariff barriers.
12. There are no shipping costs.

Given these assumption, Ohlin's thesis contends that a province export goods which utilisation relatively a greater proportion of its abundant as well as inexpensive factor. While same province import goods whose production requires the intensive utilisation of the nation's relatively scarce as well as expensive factor.

Understanding The Concept of Factor Abundance ↓

In the 2 countries, 2 commodities & 2 constituent model, implies that the uppercase rich province volition export uppercase intensive commodity as well as the labour rich province volition export labour intensive commodity. But the concept of province beingness rich inward 1 constituent or other is non really clear. Economists quite ofttimes define constituent abundance inward terms of constituent prices. Ohlin himself has followed this approach. Alternatively constituent abundance tin hold upward defined inward physical terms. In this case, physical amounts of uppercase & Labour are to hold upward compared.

• Price Criterion for defining Factor Abundance ↓

A province where uppercase is relatively cheaper as well as labour is relatively costly is said to hold upward uppercase rich country. Whereas a province where labour is relatively cheaper as well as uppercase is relatively costly is said to hold upward labour rich country.

Price of the constituent tin hold upward symbolically measured equally follows :-

In to a higher identify relation,

1. P refers to cost of the factor,
2. K refers to Capital,
3. L refers to Labour,
4. E stands for England, and
5. I stands for India.

Note:- In reality, England is non a province else a component of Great Britain (U.K). England is called a province inward this article merely for the sake of learning example.

The to a higher identify analysis highlights a fact that inward England uppercase is cheap, as well as therefore it is a uppercase abundant country. Whereas inward India, Labour is cheaper, as well as thus it is a labour rich country.

Now lets empathize how such a designing of merchandise volition necessarily emerge.

• Diagram Explaining Heckscher Ohlin's H-O Theory ↓

Let us convey an illustration of same 2 countries viz; England as well as Republic of Republic of India where England is a uppercase rich province piece Republic of Republic of India is a labour abundant nation.

In the to a higher identify diagram XX is the isoquant (equal production curve) for the commodity X produced inward England. YY is the isoquant representing commodity Y produced inward India. It is really clear that XX is relatively uppercase intensive piece YY is relatively labour incentive. The constituent uppercase is represented on Y-axis piece the constituent labour is represented on the horizontal X-axis.

PA is the cost trouble or budget trouble of the province England. The cost trouble PA is tangent to XX at E. The cost trouble PA is equally good tangent to YY isoquant at K. The indicate K volition aid us to honour out how much of uppercase as well as labour is required to attain 1 unit of measurement of Y inward England.

P₁B is the cost trouble of the province India, The cost trouble P₁B is tangent to YY at I. The cost trouble RS which is drawn parallel to P₁B is tangent to XX at M. This volition aid us to honour out how much of uppercase as well as labour is required to attain 1 unit of measurement of commodity X inward India.

Under the given situations, the province England volition select the combination E. Which way to a greater extent than specialisation on uppercase goods. It volition non select the combination K because it is to a greater extent than labour intensive as well as less uppercase intensive.

Thus according to Ohlin, England volition specialise on production of goods X yesteryear using the inexpensive constituent uppercase extensively piece Republic of Republic of India specialises on commodity Y yesteryear using the inexpensive constituent labour available inward the country.

The Ohlin's theory concludes that :-

1. The footing of internal merchandise is the divergence inward commodity prices inward the 2 countries.
2. Differences inward the commodity prices are due to cost differences which are the results of differences inward constituent endowments inward 2 countries.
3. A uppercase rich province specialises inward uppercase intensive goods & exports them. While a Labour abundant province specialises inward labour intensive goods & exports them.

Limitations of Heckscher Ohlin's H-O Theory ↓

Heckscher Ohlin's Theory has been criticised on footing of next grounds :-

1. Unrealistic Assumptions : Besides the green assumptions of 2 countries, 2 commodities, no carry cost, etc. Ohlin's theory equally good assumes no qualitative divergence inward factors of production, identical production function, constant render to scale, etc. All these assumptions makes the theory unrealistic one.
2. Restrictive : Ohlin's theory is non gratis from constrains. His theory includes exclusively 2 commodities, 2 countries as well as 2 factors. Thus it is a restrictive one.
3. One-Sided Theory : According to Ohlin's theory, render plays a pregnant role than need inward determining constituent prices. But if need forces are to a greater extent than significant, a uppercase abundant province volition export labour intensive proficient equally the cost of uppercase volition hold upward high due to high need for capital.
4. Static inward Nature : Like Ricardian Theory the H-O Model is equally good static inward nature. The theory is based on a given province of economic scheme as well as amongst a given production business office as well as does non convey whatever change.
5. Wijnholds's Criticism : According to Wijnholds, it is non the constituent prices that decide the costs as well as commodity prices but it is commodity prices that decide the constituent prices.
6. Consumers' Demand ignored : Ohlin forgot an of import fact that commodity prices are equally good influenced yesteryear the consumers' demand.
7. Haberler's Criticism : According to Haberler, Ohlin's theory is based on partial equilibrium. It fails to laissez passer on a complete, comprehensive as well as full general equilibrium analysis.
8. Leontief Paradox : American economist doc Wassily Leontief tested H-O theory nether U.S.A conditions. He works life out that U.S.A exports labour intensive goods as well as imports uppercase intensive goods, but U.S.A beingness a uppercase abundant province must export uppercase intensive goods as well as import labour intensive goods than to attain them at home. This province of affairs is called Leontief Paradox which negates H-O Theory.
9. Other Factors Neglected : Factor endowment is non the sole constituent influencing commodity cost as well as international trade. The H-O Theory neglects other factors similar technology, technique of production, natural factors, dissimilar qualities of labour, etc., which tin equally good influence the international trade.