Industrial Management Interview Question:

Explain the Modern Theory of International Trade. How is it an improvement over the Classical theory?

Submitted by: Administrator

This theory was propounded by Eli-heckscher(1879-1952) and
later refined by Swedish economist Bertil Ohlin(1899-1979)
in 1933.
Acoording to Ohlin, the differences in the factor prices
are due to the differences in the factor endowments in
different countries and the differences in production
functions for different commodities. Hence Ohlin's theory
can be called factor endowment theory.

ASSUMPTIONS OF THEORY
1.There are 2 countries or regions say X and Y, each having
a free papre currency of producing any two commodities.
2. There are 2 factors of production i.e. labour and
capital.
3. the factors of production are fully mobilewithin each
region of a country while they are rtelatively immobile in
between any two regions or two countries.
4. Competition in all markets.
5. Each factor is fully employed in each country with or
without trade.
6. There are no transportation of information costs.
7. There are no imposed tarrifs or other barriers to trade.
8. All production functions are lineally homogeneous.
9. All production functions are immune to factor intensity
reversals.
10. Both countries produce both goods with or without trade.
Submitted by: Administrator