The Modern Theory of International Trade
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The Modern Theory of International Trade

The modern theory of International trade Bertil Ohlin considers the comparative cost theory unrealistic because it does not take into account complete cost differences. It only considers the wages and their output; it ignores other costs.

The modern theory of International trade

Bertil Ohlin considers the comparative cost theory unrealistic because it does not take into account complete cost differences. It only considers the wages and their output; it ignores other costs.

Further, the classical theory of comparative cost is based on the assumption of the comparative immobility of the factors of production between different countries. But Ohlin points out that this immobility is also to be found between two regions of the same country. That is why Ohlin observes, "International trade is but a special case of local or inter-regional trade." Hence, according to Ohlin, there is no need to have a separate theory of international trade.

Ohlin calls the comparative cost theory as dangerous because if considers only two countries and two commodities, but applies it to several countries and numerous commodities.

Moreover, the comparative cost theory is static and cannot explain the complex situations of the dynamic world.

Theory or General Equilibrium Theory

In view of the criticism to which classical theory has been subjected, modern economists have rejected it. Heckscher and Ohlin, two Swedish economists, have put forward a theory which is considered a modern theory. It is a general equilibrium theory and. equates the demand for and supply of internationally traded commodities. Ohlin points out the mutual inter¬dependence of prices of the commodities. Ohlin points out the mutual inter-dependence of prices of the commodities, the prices of the required factors, the demand for the commodity as well as the demand tor and supply of the required factors. This theory is an extension to international trade of the general theory of value. We know that the price of a commodity is determined by the demand for and supply of it, i.e., the preferences and incomes of the consumers, on the one hand, and production possibilities, on the other. At the point of equilibrium, the demand and supply will be equal to each other and also the price of the commodity equals its cost of production per unit.

The cost of production is composed of the prices paid for the factors required for the production of the commodity. These factor prices determine the consumers' incomes from which arises the demand for the commodity. Ohlin thus points out the mutual interdependence of prices of the commodities, the prices of the required factors, the demand for the commodity as well as the demand for and supply of the factors.

This analysis is applicable to a single market in a region or a country. But Heckscher and Ohlin have extended the theory of value applicable to a single market to the determination of values internationally or to exchange between different regions or countries.

Ohlin observes: "International trade is but a special case of inter-local or inter-regional trade." Hence, according to Ohlin, there is no need to have a separate theory of international trade. He says that the same fundamental principle holds good of all trade, whether it is trade between individuals of the same country or between different nations. The classical theory of comparative cost is based on the assumption of comparative immobility of the factors of production between different countries. But Ohlin points out that this immobili¬ty is to be found even between two regions of the same country.

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