Theory Of Neo-Classical Trade

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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…show more content…
However, with increasing returns to scale (decreasing costs), ie.,when Economies of Scale exist in production, mutually beneficial trade can take place even when the two nations are identical in every respect. Even if all countries are identical in their production abilities and have identical production possibility curves; there could be a basis for trade as long as there are Differences in Tastes. The Technological Gap between countries and the shift in the comparative cost advantage in production over the Product Cycle also give raise to international trade. According to the Availability Approach to the theory of international trade, a nation would tend to import those commodities which are not readily available domestically and export those whose domestic supply can be easily expanded beyond the quantity needed to satisfy the domestic demand. Modern theory of international trade differs from the classical comparative cost theory in many ways and is also superior to the…show more content…
The modern theory attributes the differences in the comparative advantage to the differences in factor endowments. (iv) The classical theory presents a one-factor (labour) model, while the modern theory presents a more realistic multi-factor (labour and capital) model. (v) The classical theory never took into account the factor price differences, while the modern theory considers factor price differences as the main cause of commodity price differences, which, in turn, provides the basis of international trade. (vi) The classical theory does not provide the cause of differences in comparative advantage. The modern theory explains the differences in comparative advantage in terms of differences in factor endowments. (vii) The classical theory is a single market theory of value, while the modern theory emphasizes the importance of space element in international trade and involves a multi-market theory of
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