Page 40 - DMGT545_INTERNATIONAL_BUSINESS

Unit 2: Theories of International Trade

goods viz., watches. It may however, be noted that the above analysis does not clarify whether notes
USA will export watches and India shirts. Answer to this question depends on the demand for
these goods. If the domestic demand of USA for watches is less than the supply, then alone it will
export watches, otherwise not. Likewise, India too will export shirts only if domestic demand for
shirts is less than the supply.

Y
P 1
R

G
P 2
WATCHES I E

F

O G 1 I 1 P 1 P 2 X
SHIRTS

Did u know? It was Eli Heckscher who proved that international trade take place because
of difference of costs in different countries.

self assessment

Fill in the blanks:
6. Price criterion of factor ................ means that a country where capital is relatively cheap and
labor relatively dear will be called capital abundant country.
7. ................ criterion of factor abundance or scarcity means that if in a country capital ratio
is greater than labour as against another country, then it will be called capital intensive
country.
8. ................, which require scarce factors on a large-scale, are imported because their domestic
prices are high.
9. If in a country labour ratio is greater than ................ as against another country, then it will
be called labour intensive country.
10. If capital is relatively dear and labour relatively cheap, such a country will be called capital
................ country.

2.5 country similarity theory

This theory was developed by Staffan B. Linder, a Swedish economist, on the basis of his
observation of the pattern of international trade since 1970s. According to this theory, developed
countries trade more with other developed countries. About ¾ of total world exports is among
the developed countries.
This fact, by itself, is an indictment of Heckscher-Ohlin’s factor endowment theory. According
to the H-O theorem, the incentive to trade is greatest among nations of radically different
factor endowments. This means that trade would take place in larger part between developed
manufacturing countries and developing countries producing primary products (i.e., natural
resource commodities such as oil and petroleum) and labour-intensive products.

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