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8 views

Annu

Uploaded by

vishalby11
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© © All Rights Reserved
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Evaluation of

international trade
theories
Theories of international trade

Absolute
Factor
Cost
Endowment
Advantage
Absolute Cost Advantage
➢Absolute advantage is when a producer can provide a good or service in
greater quantity for the same cost, or the same quantity at a lower cost,
than its competitors.
➢A concept developed by Adam Smith, absolute advantage can be the basis
for large gains from trade between producers of different goods with
different absolute advantages.1
➢By specialization, division of labor, and trade, producers with different
absolute advantages can always gain more than producing and consuming
in isolation.
➢Absolute advantage can be contrasted with comparative advantage, which
is the ability to produce goods and services at a lower opportunity cost.
assumptions
Two Countries
Positive Sum
and Two
Game
Products

No
Transportation Free Trade
Cost

Perfect and
Specialization in
Free
Production
Competition
Diagram :-

Table :-
Criticism of the theory
Although this theory talks about and gives various ways to flourish in international trades, it
can also be criticized in many ways.
▪ This theory argues that there exist only two countries and two products but in reality the
world is big. In fact, today international trade refers to trade between many countries and
transactions of many products not only two products and two countries.
▪ It is not possible to assume that there does no exist transportation cost in international
trades.
▪ Free trade or no government intervention policy may adversely affect the nation when
private sectors become so powerful and try to exploit natural resources and set trade
direction for their personal benefits only.
Factor Endowment
✓ The Heckscher-Ohlin model is an economic theory that proposes that
countries export what they can most efficiently and plentifully produce.

✓ Also referred to as the H-O model or 2x2x2 model, it's used to evaluate
trade and, more specifically, the equilibrium of trade between two
countries that have varying specialties and natural resources.

✓ The model emphasizes the export of goods requiring factors of


production that a country has in abundance. It also emphasizes the
import of goods that a nation cannot produce as efficiently.
assumptions
1. 2*2*2 model, i.e, this theory relates to two countries, two commodities and two factors.
2. There is same production function for each commodity in two countries.
3. Factors are mobile within the country but immobile between two countries.
4. There is a perfect competition both in commodity and factor market.
5. There is free trade i.e., the movement of goods between countries is not hindered by any
restrictions.
6. Consumer's tastes and preferences are identical in two countries.
7. Technique of production employed in two countries is the same.
8. There is lack of transport cost.
9. Goods can be classified on the basis of factor intensity, i.e, capital intensive and labour
intensive goods.
10.Production function of all goods is homogeneous of the first degree.
H-O theory has been explained
on the basis of two criteria

Price Physical
criterion of criterion of
factor factor
abundance abundance
or scarcity or scarcity
Price criterion of factor
abundance or scarcity
Germany (Pc/PL} < India {Pc/PL}
P = Price
C = Capital
L = Labour

Diagram :-
Physical criterion of factor
abundance or scarcity
Germany (Pc/PL} > India {Pc/PL}
P = Price
C = Capital
L = Labour

Diagram :-
Criticism of the theory

Partial
Unrealistic Factors are not No Constant Limited Existence of
Static Theory Equilibrium
Assumption Homogeneous Tastes Explanation Free Trade
Analysis

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