Neo Classical Trade Theory Essay

Neo – Classical Trade Theories

The Factor Endowment Theory, developed by Eli Heckscher and Bertil Ohlin, establishes that a nation will export the product that uses a large amount of its relatively abundant resource, and it will import the product which in production uses the relatively scarce resource. Therefore, the factor endowment theory predicts that India, with its relative abundance of labour will export shoes and shirts while the United States with its relative abundance of capital, will export machines and chemicals. The factor endowment theory consists of two important theorems, mainly, (1) Heckscher Ohlin theorem which states that a country has comparative advantage in the production of that commodity which uses intensively the country’s more abundant factor, and (2) Factor price equalisation theorem which says that free international trade equalises factor prices between countries, and, thus, serves as a substitute

products which are similar but not identical (for example, different models of motor cars). There is a need of a variety of models which seek to explain the reasons for intra-industry trade. Sodersten and Reed point out that these models, despite their variety, have the following common features. First, while it is possible to deduce that intra-industry trade will emerge, it is often impossible to predict which country will export which good(s).Second, diversity of preferences among consumers, possibly coupled with income differences, plays an important role. Third, similarity of tastes between trading partners may play a major role. Fourth, economies of scale are a frequent element of intra-industrial trade models, and maybe an important source of gains from trade. Finally, in many of these models they move from autarky to free trade will involve floor adjustment costs than would be the case in inter-industry