THEROIES OF

INTERNATIONAL TRADE
AKSHAY RAJ R
 HECKSCHER- OHLIN THEORY
• Factor endowment theory

• It is the general equilibrium of mathematic model of international trade developed by Eli Fillip
Heckscher and Bertil Ohlin .

• It is the theory of comparative advantage in International trade.

• According to this theory country in which capital is abundant and labour is relatively scarce
should produce and export capital intensive products and import labour intensive product from
another country in which labour is abundant and cheep.
ASSUMPTION
• 2*2*2 method – 2 countries,2 goods and 2 factors of production.

• Constant Return to scale is applied.

• Identical production technology is applied to same product.

• Technology used in two product in two countries are different.

• Factor mobility with in the country.

• Factor is immobile between the country.

• Perfect competition.

• Same taste and preference.

• Balance trade ( import = export)

• No restriction in international trade.

• Full employment of resources ( capital and labour )

GRAPH SHOWING HECKSCHER- OHLIN THEORY
 LEONTIEF PARADOX
• Prof Wassily W. Leontief invented this theory.

• It is the first empirical test of Heckscher-ohlin theory.

• Through this theory Leontief reach a paradoxical conclusion that the United States the most important capital abundant country

by any criterion produce and export labour intensive commodities and import capital intensive commodities . This result came

to known as Leontief Paradox.

• He argued that US labours could not really be compared to the labours in other country . Productivity of US labour is 3 times

greater than that of foreign worker . There for they focus on labour intensive product because labour is efficient than capital.

• This theory state that production and export of one country is depends on the efficiency or marginal product of the resources

they hold rather than their abundance.