Page 63 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

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

commodities that are not substantially different from the point of view of their intended purpose Notes
(clothes, automobiles, watches, cameras, cigarettes, liqueurs, etc.). These commodities, however, due
to different industrial designs, past excellence, advertising, real or imaginary secondary characteristics
and so on and so forth, are considered different by consumers. This creates, on the one hand, a more
or less limited monopolistic power of the single producing countries, and on the other a consumers’
demand for foreign commodities that they believe different from similar domestic commodities, the
result being to create international trade.
Linder Theory of Trade
The Linder hypothesis is an economics conjecture about international trade patterns : The more
similar the demand structures of countries, the more they will trade with one another. Further,
international trade will still occur between two countries having identical preferences and factor
endowments (relying on specialization to create a comparative advantage in the production of
differentiated goods between the two nations).
Development of the theory

The hypothesis was proposed by economist Staffan Burenstam Linder in 1961 as a possible resolution
to the Leontief paradox, which questioned the empirical validity of the Heckscher-Ohlin theory
(H-O). H-O predicts that patterns of international trade will be determined by the relative factor-
endowments of different nations. Those with relatively high levels of capital in relation to labor
would be expected to produce capital-intensive goods while those with an abundance of labor relative
to (immobile) capital would be expected to produce labor intensive goods. H-O and other theories of
factor-endowment based trade had dominated the field of international economics until Leontief
performed a study empirically rejecting H-O. In fact, Leontief found that the United States (then the
most capital abundant nation) exported primarily labor-intensive goods. Linder proposed an
alternative theory of trade that was consistent with Leontief’s findings. The Linder hypothesis presents
a demand based theory of trade in contrast to the usual supply based theories involving factor
endowments. Linder hypothesized that nations with similar demands would develop similar
industries. These nations would then trade with each other in similar, but differentiated goods.
Empirical tests

Examinations of the Linder hypothesis have observed a “Linder effect” consistent with the hypothesis.
Econometric tests of the hypothesis usually proxy the demand structure in a country from its per
capita income : it is convenient to assume that the closer are the income levels per consumer the closer
are the consumer preferences. (That is, the proportionate demand for each good becomes more similar,
for example following Engel’s law on food and non-food spending.)
Self-Assessment
1. Choose the correct options:
(i) What is the most important fact about U.S. international trade in the after-war period?
(a) Imports exceed exports.
(b) Both imports and exports grew significantly as a share of GDP.
(c) Exports and imports are a large share of U.S. GDP.
(d) Exports exceed imports.
(ii) Which of the following is NOT true?
(a) Small countries depend more on trade than large countries.
(b) U.S. imports exceed U.S. exports.
(c) Imports cannot exceed exports for an extended period of time.
(d) Economists believe that international trade is beneficial for all countries involved in it,
in most cases.

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