H.

P NATIONAL LAW UNIVERSITY,

SHIMLA
SYNOPSIS
OF
ECONOMICS
(HECKSCHER – OHLIN THEORY OF TRADE – ITS MAIN FEATURES,
ASSUMPTIONS AND LIMITATIONS)

SUBMITTED TO:
SIR HARI CHAND THAKUR
SUBMITTED BY:
NAVISHA VERMA
B.A.LLB(HONS.)
3rd SEMESTER
ROLL NUMBER: 1020181960
Academic Year 2018-2019

ABSTRACT
The structure of the modern theory of international trade rests fundamentally upon the theory
developed by Eli Heckscher and Bertil Ohlin. This theory has almost completely replaced the
classical and neo-classical theories related to international trade. But its does not mean that
there is some real conflict between the Hecksher-Ohlin approach and the comparative costs
approach or that the former, in any way, invalidates the latter. In fact, the Heckscher-Ohlin
approach supplements the traditional approach in a powerful manner. It goes behind the
comparative costs doctrine to investigate the basic cause of the relative differences in costs.
Heckscher and Ohlin have traced the cause of cost differences to relative factor endowments
and relative intensity theory. According to this theory, countries which are rich in labour will
export labour-intensive goods and those rich in capital will export capital-intensive goods.

OBJECTIVE
Earlier, the class theories which were developed by Adam Smith, Ricardo and Mill
maintained that comparative cost advantage of the trading countries was based on the
differences in the productivity of labour (single factor) but they failed to provide a
satisfactory explanation for such differences. The classical theory did not explain the
fundamental cause of the commodity price differences.
The theory for analysing the pattern of international trade, developed by Eli Heckscher and
Bertail Ohlin attempted to deal with this vital question. This theory did not supplant the
traditional comparative costs theory but supported it by providing explanation for the relative
commodity price differences between the countries and their respective comparative
advantages. According to them, the differences in commodity prices arise because of factor
endowments (factor supplies) in these countries. The project is an attempt at the study of
features, assumptions and criticism of this theory.

METHODOLOGY
The method adopted for research is doctrinal research. Various other literary sources such as
research papers and books have also been referred.

SOURCES
 Rana, K.C. and K.N. Verma, International Economics, 6th ed, 2016.
 Bo Soderstein and Geoffrey Reed, International Economics (MacMillan,2005)

BIBLIOGRAPHY
Books:
 Rana, K.C. and K.N. Verma, International Economics, 6th ed, 2016.
 Bo Soderstein and Geoffrey Reed, International Economics (MacMillan,2005)
Internet sources:
 P Choudhary, Modern Theory of International Trade: Features, Assumptions &
Criticisms, MICRO ECONOMICS NOTES,
http://www.microeconomicsnotes.com/international-trade/modern-theory-of-
international-trade-features-assumptions-criticisms/16186