WKC1L1 is the resource box of England, indicating that it has abundance of capital. Welcome to EconomicsDiscussion.net! But, if the rate of exchange changes to £1 = Rs. According to Ohlin, “the immediate cause of inter-regional trade is always that goods can be bought cheaper from outside in terms of money than they can be produced at home.”. Ohlin’s theory not only accepts the comparative advantage as the basis of international trade, but also further develops the Ricardian theory by providing answer to the above question. The modern theory also assumes that factors of production are perfectly immobile between countries. Modern theory pays greater attention to the supply side of international trade. Thus, India exports its cheap labour, embodied in its labour- intensive exports. For example, Bowen, Leamer and Sveikauskas took a sample of 23 countries and 12 factors of production and calculated the ratio of each country’s endowment of each factor to the world supply. But, it does not tell- why do the costs differ? (x) Productive factors cannot move internationally. Comparing the two positions, we find that with specialization, there is a gain of 10 kg. Columns (2) and (3) denote factor prices in India and England stated in their respective currencies, i.e., in Rupees and Pounds. The following are the general features of the modern theory of international trade: According to the classical economists, international trade was basically different from internal trade. The modern theory of international trade is an extension of the general equilibrium theory of value. (iii) Capital is also embodied in other productive factors. Referring back to our equation, we see that 10 kg. Assuming a given demand, it follows that a capital-rich country has cheaper capital or lower capital price and a labour-abundant country has a relatively lower labour price. WAMC is India’s efficiency locus, describing the set of output alternatives for the production of wheat and cloth depending upon different production possibility curves. Disclaimer Copyright, Share Your Knowledge The major historical theories are known as Classical; these are based on the country’s perspectives, generally called country-based theories. He says that the same fundamental principle holds good of all trade, whether it is internal trade or international trade. Modern theory fails to explain the Leontief Paradox. Mercantilism. Economists have attempted to explain the Leontief paradox and to reconcile the contradictory result with the theoretical prediction: (i) If human capital as well as physical capital were included in the analysis, the results might have shown the American exports to be capital intensive. Heckscher-Ohlin theory is known as factor endowments theory or factor proportions theory because it emphasises the interplay between the proportions in which different factors of production are available in different countries, and the proportions in which they are used in producing different goods. (ii) In each country, the economic structure, in the form of output combinations, shifts in the direction of increased specialisation in the production of that commodity which use relatively more of abundant factor. The Standard Model of Trade (Paul Krugman – Maurice Obsfeld Model) 4. The Krugman–Obsfeld Model is the standard model of trade. JANUARY 2011. INTERNATIONAL TRADE & INVESTMENT THEORY CLASSICAL COUNTRY- BASED TRADE THEORIES MERCANTILISM ABSOULUTE ADVANTAGE COMPARATIVE ADVANTAGE RELATIVE FACTOR ENDOWMENT(FACTOR PROPORTIONS) MODERN FIRM- BASED TRADE THEORY COUNTRY SIMILARITY THEORY INTERNATIONA L PRODUCT LIFE CYCLE INTERNATIONA L INVESTMENT THEORY INTERNATIONA L INVESTENT THEORIES OWNERSHIP ADVANTAGE THEORY INTERNALIZATI ON THEORY ECLECTIC THEORY … Important factors influencing the pattern of trade between two countries are- (a) differences in the supply of factors of production; (b) differences in factor efficiency; (c) differences in the state of technology; (e) differences in the economies of scale; (f) differences in population growth; (g) differences in the rate of capital formation; (h) differences in the development of new products, etc. Before publishing your Articles on this site, please read the following pages: 1. Thus, indirectly, factors in abundant supply are exported and the factors in scanty supply are imported.”. The same is true for other factors of production. Studies based on global data also confirmed the Leontief paradox. Ohlin, on the contrary, believes that there is no basic difference between local or inter-regional trade and international trade, and no separate theory of international trade is needed. Prices of the commodities are determined by their utility (or demand), while the factor prices are dependent on the demand and prices of the commodities produced by them.