Professor Bertil Ohlin and Hecksher have criticized the
Costs Theory. They regard cost theory as unrealistic because it does not take
into account complete cost differences. Moreover they say, it is based on the
assumption of the comparative immobility of factors of production between the
countries which. Is not correct. In addition to this, the cost theory is based
on the assumption of static conditions. Since the present day world is highly
dynamic, this cost theory is, therefore, useless and so is rejected.
The modern theory of international trade also named as the
Theory of International Trade was developed by two Sweedish economists, Hecksher
According to these economists, the main cases and the regulator of international trade is the differences in the
relative prices of the commodities between the countries. The differences in the
prices of goods arise due to:
(i) Difference in climatic and
technical know how.
(ii) Difference in the allocation of
resources for the production of goods.
(iii) Variation in the demand for and supply of commodity as well as the
demand for and the supply of the required factors.
According to Ohlin:
If a country has an abundant supply of a factor or
factors relative to another, they will be available to the firms at cheaper
prices. The costs of production of the goods which require these abundant
factors will be comparatively low. A region, therefore, allocates its resources
in accordance with the comparative advantage and specializes in the production
of the commodities which require cheap factors. It exports these commodities and
imports those goods which are cheaper in other countries due to the availability
of abundant factors required for the production of those goods.
between the regions continues till the differences in factor supplies is offset
by a difference in their demand conditions. Trade of goods between the
countries, is, thus, determined inter alia by the equilibrium of the
demand and supply of respective commodities in a country. This principle also
applies to inter-regional trade. Thus according to them:
"International trade is
but a special case of inter-local or inter-regional trade".
Ohlin theorem is now explained by
taking two trading countries Pakistan and Japan. In Pakistan, as we know, land
is relatively abundant and capital is relatively scarce. Conversely, in Japan
capital is relatively abundant and land relatively scarce.
Pakistan due to relatively abundant
supply of land and farmers is able to produce agricultural goods, cotton and
wheat at lower prices than Japan. Japan, on the other hand, having relatively an
abundant supply of capital and know-how, produces machinery at cheaper cost. If
Pakistan specializes in the production of wheat and cotton and Japan in
machinery, both the countries will gain from increased output and lower prices
of the products of each country.
The specialization and trade between Pakistan and Japan will continue so long
as the differences in the relative prices of the factors exist. When due to
increased demand for each other goods, the resource prices are equalized, trade
is then not gainful to both the countries.
Criticism on Ohlin's
The factors proportion theory of trade put forward by Ohlin has been
criticized on the following grounds:
(i) Based on over simplified assumptions: The theory is based on
oversimplified assumptions which are unrealistic.
(ii) Partial equilibrium analysis:
According to Heberler, the General
Equilibrium theory gives a partial equilibrium analysis of international trade.
In the real world selling costs, international organization of industries, etc.,
have a direct bearing on trading countries. Trade does not originate in response
to differences in the relative prices of the commodities alone.