Friday, June 7, 2013

Modern International Trade

The modern theory of international trade is essentially a logical extension of the general equilibrium approach. The Heckscher-Ohlin-Samuelsson (H.O.S) theorem is an empirically supported argument of Heckscher-Ohlin’s factor endowment theory developed by the Ohlin-Samuelson research programme in the field of international trade theory.

The H-O-S model of pure trade theory (two commodities, two factors, two countries) states that under the given conditions a country will export the commodity that uses its relatively abundant factor intensively and import the commodity that required intensive use of its relative scarce factor in the production function. Since the publication of Samuelsson’s celebrated work on this theorem in 1948, a large number of trade theorists have focused their attention on validating the factor- endowment basis of intentional trade on empirical grounds. Attempts have been made with little success to reverse the Leontief paradox which cited the case study of the untied states to show that though the country is capital abundant, its exports are of labour intensive goods and imports constitute capital intensive goods – which is quite contrary to the norm of H.O.S theorem.

The conservative trade theorists, however, continue to adhere to the H.O.S theorem for two reasons. First, its ideology of supporting frees trade and seconds its close connection with abrasion general equalilibrium theory which is consistent with perfect competition and monopolistic competition.

During the 1980s, however, a new brand of international economics has emerged which has successfully broken the grip of the single approach and sought to analyse the issues under relaxed assumption and using variants of the H.O.S model.

Leamer argues that the Leontief paradox is based on some misuse standing of the data. As a matter of fact, the U.S.’s net export contains both capital and labour. In such a case, a correct test of the factor abundance should compare capital component in consumption per worker. Thus, a country is regarded as capital abundant when:
(Kx – Km) > 0,
(Lx – Lm) > 0,
(Kx – Km)/(Lx – Lm) > (Kc/Lc)
Kx = Capital embodied in exports,
Km = capital embodied in imports,
Kc = capital embodied in consumption,
Lx = Labour embodied in exports,
Lm = labour embodied in imports and Lc = labour embodied in consumption

Applying this criterion to Leontief’s 1947 data, Lamer observed that the U.S. was a capital abundant country exporting capital intensive goods and thus substantiated the H.O.S theorem.
Attempts have also been made by some empirical trade theorists to extend the H.O.S model to the saturation of monopolistic co0mpetition in foreign trade, calling it Chamberlin-Heckscher-Ohlin (C-H-O) approach for explaining intra industry trade.

In general trade, theorists have continued to adhere to the standard Heckscher-Ohlin model on three considerations. First, its pedagogical base which serves as an accurate predictor of observed trade data, second, it ideological base of free trade, and third, it is embedded in the general equilibrium framework of the neo classical research programme.

The Heckscher-Ohlin framework is generally acceptable for its explanation role of national factor endowment differences in determining the pattern of net trade and specialization according to the principle of comparative advantage. In the modern industry trade, that is exchange of the same products and this phenomenon required other explanations such as differences in economies of scale demanded pretences product differentiation and technological gap hypotheses. These other factors are complements rather than substitutes to the basic hypothesis of relative costs differences as determined by factor endowments.

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