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Pavitar Parkash Singh, LPU Unit 4 : Modern Theories of International Trade : Theorem of Factor Price Equalization, H-O Theory, Kravis and...

Unit 4 : Modern Theories of International Trade : Theorem of Notes
Factor Price Equalization, H-O Theory, Kravis and Linder
Theory of Trade

CONTENTS
Objectives
Introduction
4.1 The Factor-Price Equalization Theorem
4.2 The Heckscher-Ohlin Theorem (H-O Theory)
4.3 Kravis and Linder Theory of Trade
4.4 Summary
4.5 Key-Words
4.6 Review Questions
4.7 Further Readings

Objectives

After reading this Unit students will be able to:
• Explain the Factor-Price Equalization Theorem.
• Discuss H-O Theory.
• Understand Kravis and Linder Theory of Trade.
Introduction

Modern theories of International Trade can be understand studying the following theory:
1. Resources and Trade (The Eli Heckscher and Bertil Ohlin Model)
The Heckscher - Ohlin theory explains why countries trade goods and services with each other,
the emphasize being on the difference of resources between two countries. This model shows that
the comparative advantage is actually influenced by the interaction between the resources countries
have (relative abundance of production factors) and production technology (which influences the
relative intensity by which the different production factors are being utilized during the production
cycle.
The model starts with the presumption that country A produces two products: food (X) and textiles
(Y). These two kinds of production need two different inputs, territory (T) and labour (L), which
are available in limited quantities. In the same time, food production (X) requires more land, so it
can be said it is territory intensive and textile (Y) production requires more labour, being in this
way labour intensive.
Beginning with these presumptions, the Heckscher-Ohlin model explains the implications trade
between two countries A and B has, if the countries produce the same products: food (X) and
textiles (Y).
The relative resource abundance, factors intensity and trade specialization.

Country Inputs and production without trade The relative abundance and trade
Product specialization in the product for which
there is a factor intensity.

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