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 too known every bit Heckscher Ohlin (HO) Model / Theorem / Theory.

According to Bertil Ohlin, merchandise arises due to the differences inwards the relative prices of dissimilar goods inwards dissimilar countries. The departure inwards commodity toll is due to the departure inwards constituent prices (i.e. costs). Factor prices differ because endowments (i.e. upper-case missive of the alphabet as well as labour) differ inwards countries. Hence, merchandise occurs because dissimilar countries receive got dissimilar constituent endowments.

The Heckscher Ohlin theorem states that countries which are rich inwards labour volition export labour intensive goods as well as countries which are rich inwards upper-case missive of the alphabet volition export upper-case missive of the alphabet 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 create 2 commodities or goods (labour intensive as well as upper-case missive of the alphabet intensive).
4. There is perfect contest inwards both commodity as well as constituent markets.
5. All production functions are homogeneous of the get-go grade i.e. production business office is dependent area to constant returns to scale.
6. Factors are freely mobile inside a province but immobile betwixt countries.
7. Two countries differ inwards constituent supply.
8. Each commodity differs inwards constituent intensity.
9. The production business office remains the same inwards dissimilar countries for the same commodity. For e.g. If commodity A requires to a greater extent than upper-case missive of the alphabet inwards 1 province so same is the illustration inwards other country.
10. There is total job of resources inwards both countries as well as need are identical inwards both countries.
11. Trade is gratuitous i.e. at that spot are no merchandise restrictions inwards the shape of tariffs or non-tariff barriers.
12. There are no transportation costs.

Given these assumption, Ohlin's thesis contends that a province export goods which utilization relatively a greater proportion of its abundant as well as inexpensive factor. While same province import goods whose production requires the intensive utilization 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 upper-case missive of the alphabet rich province volition export upper-case missive of the alphabet intensive commodity as well as the labour rich province volition export labour intensive commodity. But the concept of province beingness rich inwards 1 constituent or other is non real clear. Economists quite ofttimes define constituent abundance inwards terms of constituent prices. Ohlin himself has followed this approach. Alternatively constituent abundance tin hold upward defined inwards physical terms. In this case, physical amounts of upper-case missive of the alphabet & Labour are to hold upward compared.

• Price Criterion for defining Factor Abundance ↓

A province where upper-case missive of the alphabet is relatively cheaper as well as labour is relatively costly is said to hold upward upper-case missive of the alphabet rich country. Whereas a province where labour is relatively cheaper as well as upper-case missive of the alphabet is relatively costly is said to hold upward labour rich country.

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

In to a higher identify relation,

1. P refers to toll 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 constituent of U.K. (U.K). England is called a province inwards this article simply for the sake of learning example.

The to a higher identify analysis highlights a fact that inwards England upper-case missive of the alphabet is cheap, as well as thus it is a upper-case missive of the alphabet abundant country. Whereas inwards India, Labour is cheaper, as well as thus it is a labour rich country.

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

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• 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 upper-case missive of the alphabet rich province patch 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 inwards England. YY is the isoquant representing commodity Y produced inwards India. It is real clear that XX is relatively upper-case missive of the alphabet intensive patch YY is relatively labour incentive. The constituent upper-case missive of the alphabet is represented on Y-axis patch the constituent labour is represented on the horizontal X-axis.

PA is the toll trouble or budget trouble of the province England. The toll trouble PA is tangent to XX at E. The toll trouble PA is too tangent to YY isoquant at K. The betoken K volition aid us to honor out how much of upper-case missive of the alphabet as well as labour is required to create 1 unit of measurement of Y inwards England.

P₁B is the toll trouble of the province India, The toll trouble P₁B is tangent to YY at I. The toll trouble RS which is drawn parallel to P₁B is tangent to XX at M. This volition aid us to honor out how much of upper-case missive of the alphabet as well as labour is required to create 1 unit of measurement of commodity X inwards India.

Under the given situations, the province England volition pick out the combination E. Which agency to a greater extent than specialisation on upper-case missive of the alphabet goods. It volition non pick out the combination K because it is to a greater extent than labour intensive as well as less upper-case missive of the alphabet intensive.

Thus according to Ohlin, England volition specialise on production of goods X past times using the inexpensive constituent upper-case missive of the alphabet extensively patch Republic of Republic of India specialises on commodity Y past times using the inexpensive constituent labour available inwards the country.

The Ohlin's theory concludes that :-

1. The footing of internal merchandise is the departure inwards commodity prices inwards the 2 countries.
2. Differences inwards the commodity prices are due to cost differences which are the results of differences inwards constituent endowments inwards 2 countries.
3. A upper-case missive of the alphabet rich province specialises inwards upper-case missive of the alphabet intensive goods & exports them. While a Labour abundant province specialises inwards 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 2 countries, 2 commodities, no carry cost, etc. Ohlin's theory too assumes no qualitative departure inwards 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 gratuitous from constrains. His theory includes solely 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 inwards determining constituent prices. But if need forces are to a greater extent than significant, a upper-case missive of the alphabet abundant province volition export labour intensive skillful every bit the toll of upper-case missive of the alphabet volition hold upward high due to high need for capital.
4. Static inwards Nature : Like Ricardian Theory the H-O Model is too static inwards 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 receive got whatsoever change.
5. Wijnholds's Criticism : According to Wijnholds, it is non the constituent prices that create upward one's take away heed the costs as well as commodity prices but it is commodity prices that create upward one's take away heed the constituent prices.
6. Consumers' Demand ignored : Ohlin forgot an of import fact that commodity prices are too influenced past times the consumers' demand.
7. Haberler's Criticism : According to Haberler, Ohlin's theory is based on partial equilibrium. It fails to rank a complete, comprehensive as well as full general equilibrium analysis.
8. Leontief Paradox : American economist MD 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 upper-case missive of the alphabet intensive goods, but U.S.A beingness a upper-case missive of the alphabet abundant province must export upper-case missive of the alphabet intensive goods as well as 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 constituent influencing commodity toll 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 too influence the international trade.