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 past times Bertil Ohlin. Ohlin has drawn his ideas from Heckscher's General Equilibrium Analysis. Hence it is likewise known every bit 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 element prices (i.e. costs). Factor prices differ because endowments (i.e. working capital alphabetic lineament together with labour) differ inward countries. Hence, merchandise occurs because dissimilar countries receive got dissimilar element endowments.

The Heckscher Ohlin theorem states that countries which are rich inward labour volition export labour intensive goods together with countries which are rich inward working capital alphabetic lineament volition export working capital alphabetic lineament 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 ii countries involved.
2. Each dry reason has ii factors (labour together with capital).
3. Each dry reason create ii commodities or goods (labour intensive together with working capital alphabetic lineament intensive).
4. There is perfect contest inward both commodity together with element markets.
5. All production functions are homogeneous of the start grade i.e. production business office is discipline to constant returns to scale.
6. Factors are freely mobile inside a dry reason but immobile betwixt countries.
7. Two countries differ inward element supply.
8. Each commodity differs inward element 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 working capital alphabetic lineament inward i dry reason together with so same is the instance inward other country.
10. There is total occupation of resources inward both countries together with need are identical inward both countries.
11. Trade is gratis i.e. at that spot are no merchandise restrictions inward the shape of tariffs or non-tariff barriers.
12. There are no shipping costs.

Given these assumption, Ohlin's thesis contends that a dry reason export goods which occupation relatively a greater proportion of its abundant together with inexpensive factor. While same dry reason import goods whose production requires the intensive occupation of the nation's relatively scarce together with expensive factor.

Understanding The Concept of Factor Abundance ↓

In the ii countries, ii commodities & ii element model, implies that the working capital alphabetic lineament rich dry reason volition export working capital alphabetic lineament intensive commodity together with the labour rich dry reason volition export labour intensive commodity. But the concept of dry reason beingness rich inward i element or other is non real clear. Economists quite oft define element abundance inward terms of element prices. Ohlin himself has followed this approach. Alternatively element abundance tin hold upwardly defined inward physical terms. In this case, physical amounts of working capital alphabetic lineament & Labour are to hold upwardly compared.

• Price Criterion for defining Factor Abundance ↓

A dry reason where working capital alphabetic lineament is relatively cheaper together with labour is relatively costly is said to hold upwardly working capital alphabetic lineament rich country. Whereas a dry reason where labour is relatively cheaper together with working capital alphabetic lineament is relatively costly is said to hold upwardly labour rich country.

Price of the element tin hold upwardly symbolically measured every bit follows :-

In inward 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 dry reason else a constituent of United Kingdom of Great Britain together with Northern Ireland of Britain together with Northern Republic of Ireland (U.K). England is called a dry reason inward this article simply for the sake of learning example.

The inward a higher identify analysis highlights a fact that inward England working capital alphabetic lineament is cheap, together with thence it is a working capital alphabetic lineament abundant country. Whereas inward India, Labour is cheaper, together with thus it is a labour rich country.

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

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

Let us convey an instance of same ii countries viz; England together with Republic of Republic of India where England is a working capital alphabetic lineament rich dry reason spell Republic of Republic of India is a labour abundant nation.

In the inward 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 real clear that XX is relatively working capital alphabetic lineament intensive spell YY is relatively labour incentive. The element working capital alphabetic lineament is represented on Y-axis spell the element labour is represented on the horizontal X-axis.

PA is the cost trouble or budget trouble of the dry reason England. The cost trouble PA is tangent to XX at E. The cost trouble PA is likewise tangent to YY isoquant at K. The shout out for K volition aid us to discovery out how much of working capital alphabetic lineament together with labour is required to create i unit of measurement of Y inward England.

P₁B is the cost trouble of the dry reason 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 discovery out how much of working capital alphabetic lineament together with labour is required to create i unit of measurement of commodity X inward India.

Under the given situations, the dry reason England volition guide the combination E. Which agency to a greater extent than specialisation on working capital alphabetic lineament goods. It volition non guide the combination K because it is to a greater extent than labour intensive together with less working capital alphabetic lineament intensive.

Thus according to Ohlin, England volition specialise on production of goods X past times using the inexpensive element working capital alphabetic lineament extensively spell Republic of Republic of India specialises on commodity Y past times using the inexpensive element 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 ii countries.
2. Differences inward the commodity prices are due to cost differences which are the results of differences inward element endowments inward ii countries.
3. A working capital alphabetic lineament rich dry reason specialises inward working capital alphabetic lineament intensive goods & exports them. While a Labour abundant dry reason 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 park assumptions of ii countries, ii commodities, no carry cost, etc. Ohlin's theory likewise 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 entirely ii commodities, ii countries together with ii factors. Thus it is a restrictive one.
3. One-Sided Theory : According to Ohlin's theory, provide plays a meaning role than need inward determining element prices. But if need forces are to a greater extent than significant, a working capital alphabetic lineament abundant dry reason volition export labour intensive practiced every bit the cost of working capital alphabetic lineament volition hold upwardly high due to high need for capital.
4. Static inward Nature : Like Ricardian Theory the H-O Model is likewise static inward nature. The theory is based on a given province of economic scheme together with alongside a given production business office together with does non convey whatever change.
5. Wijnholds's Criticism : According to Wijnholds, it is non the element prices that decide the costs together with commodity prices but it is commodity prices that decide the element prices.
6. Consumers' Demand ignored : Ohlin forgot an of import fact that commodity prices are likewise influenced past times the consumers' demand.
7. Haberler's Criticism : According to Haberler, Ohlin's theory is based on partial equilibrium. It fails to plough over a complete, comprehensive together with full general equilibrium analysis.
8. Leontief Paradox : American economist doc Wassily Leontief tested H-O theory nether U.S.A conditions. He constitute out that U.S.A exports labour intensive goods together with imports working capital alphabetic lineament intensive goods, but U.S.A beingness a working capital alphabetic lineament abundant dry reason must export working capital alphabetic lineament intensive goods together with import labour intensive goods than to create 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 element influencing commodity cost together with international trade. The H-O Theory neglects other factors similar technology, technique of production, natural factors, dissimilar qualities of labour, etc., which tin likewise influence the international trade.