YLC - IAS /PCS

Heckscher and Ohlin Theory - Modern Theory of International Trade

Eli Heckscher propounded the trade theory based on the country's comparative advantages based on the relative availability and scarcity of resources as factors of production.His student Bertil Ohlin , later developed international trade theory of the relative factor of abundance and scarcity.

This theory takes two exchangeable commodities as factors as a framework for production.

Assumptions of this theory

There are 2 counties involved
Each country has two factors (labour and capital) .Each country produces two commodities or goods (labour intensive and capital intensive).There is perfect competition in both commodities and factor markets .Factors are freely mobile within a country but immobile between countries.Two countries differ in factory supply.Human resources are fully employed in both countries and both countries have identical demand of products.No trade restrictions in form of tariffs and non tariff barriers.No transportation costs.

Heckscher Ohlins theory has been criticised on the basis of :

1) Unrealistic Assumptions
2) Restrictive
3) One sided theory
4) Static in nature
5) Wijnhold's criticism
6) Consumers demand ignored
7)Haberlers criticism
8) Leontief Paradox