Criticism of Heckscher-Ohlin's Theory
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Criticism of Heckscher-Ohlin's Theory

Criticism of Heckscher-Ohlin's Theory According to Ohlin, the immediate cause of international trade is the difference in commodity prices which in turn is due to the differences in factor prices. The establishment of a rate of exchange between the two countries facilitates the comparison between the commodity prices prevailing in the two countries.

Criticism of Heckscher-Ohlin's Theory

According to Ohlin, the immediate cause of international trade is the difference in commodity prices which in turn is due to the differences in factor prices. The establishment of a rate of exchange between the two countries facilitates the comparison between the commodity prices prevailing in the two countries.

Thus, in Ohlin's opinion there are no fundamental differences but only quantitative differences between inter-regional and international trade.

Criticism of Heckscher-Ohlin's Theory

The following points of criticism have been offered against Heckscher-Ohlin's factor proportion theory:—

(i) Ohlin's theory is criticized on the ground that since it is based on over-simplified assumptions, it is unrealistic. But as against this it may be pointed put that the simplified assumptions were made to make it easily understandable; otherwise the theory holds good even in situations where these assumptions are absent.

(ii) Haberler has pointed out that although Ohlin's theory is more realistic, yet it remains a partial equilibrium analysis. He has failed to develop a comprehensive general equilibrium analysis.

(iii) One assumption underlying Ohlin's theory is that relative factor prices reflect relative factor endowments. This gives undue importance to supply and attaches less importance to demand. But we know that the demand conditions also explain the basis of international trade.

(iv) Also, it may be pointed out that if demand conditions are given due weight, the commodity price ratios may not correspond to cost ratios.

iv) The critics have also urged that differences of relative factor endow¬ments (which is the very basis of Ohlin's theory).are only one of the several explanations for the commodity price differences of the internationally-traded goods. Differences in production techniques or in factor qualities, consumers' demand, etc., are also important in this connection.

(vi) It is also said that the prices of commodities are not determined by factor costs, but it is the other way about. That is, the prices of the factors of production (e.g. the raw materials) are determined by the prices of final goods offered by the consumers.

Conclusion

In spite of all the shortcomings pointed out above, Heckscher-Ohlin theory offers a crucial explanation, say the best of all possible explanations, of the basis of international trade.

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