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Heckscher-Ohlin's Theory Of Comparative Advantage

798 Words4 Pages

The Heckscher-Ohlin theory of comparative advantage was produced as an alternative to the Ricardian model and “had an ideological mission; the elimination of the labor theory of value and the incorporation of the neoclassical price mechanism into international trade theory”. (Subasat, 2013). After studying both theories, it is evident they both either ignored or undermined demand. Demand in Ricardo’s theory is ignored; the theory concentrates on the supply of goods. Each country will specialize in the production of the commodity based on its comparative advantage. International trade is explained in terms of supply whereas demand is taken for granted. This is also the case in Ohlin’s theory; the significant role is played by supply than demand in determining the price. However if demand forces are more significant the capital abundant country will export labor intensive good as the price of capital will be high due to the demand for capital. Ohlin also fails to recognize that commodity prices are determined by the consumers demand. International trade is the difference in factor supplies between countries. Factor endowments are different in each country i.e in their abundance or scarcity. “The Difference in supply given the demand brings the difference in cost of factor and commodity prices”. (Akrani, 2011) Difference in labor efficiency is recognized but difference in factor supply is ignored. The H-O theory provides an explanation of price difference of factors through

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