In the classical analysis, the comparative costs differences as between two countries are due to differences in the skill and efficiency of labour, or some such accidental factors. A country may be having huge land and labor, but be relatively abundant only in one of the two. Introduction to Theories of International Trade 2. The factor proportions theorem of Ohlin also reveals the classical lacuna of placing emphasis on the quality of a single factor, labour, as playing a key role in determining comparative advantage. Internal economies of scale may lead a firm to specialize in a narrow product line to produce the volume necessary to achieve cost benefits from scale economies.
Theory of Mercantilism of International Trade: The theory of mercantilism attributes and measures the wealth of a nation by the size of its accumulated treasures. Conclusion Bilateral concepts of factor proportions theory fall short empirically when facing data with many countries and various factors of production. Japan has higher than average distance abundance for capital and all types of labor. The price of factors of production, together with technology, determines the price of final commodities. The principles of the regulatory frameworks of national governments and international organizations are also influenced to a varying extent by these basic economic theories. A simple example of a factor endowment with respect to land would be the presence of natural resources such as oil. Singapore and Hong Kong are most successful in those industries where technology needs less of land relative to the number of labor employed.
Therefore, a country should specialize in the production and export of a commodity in which the absolute disadvantage is less than that of another commodity or in other words, the country has got a comparative advantage in terms of more production efficiency. Once this is recognised, in Ohlin's theory, the apparent vices of the model turn out to be its virtues. The bicycle is at the declining stage of its life cycle in industrialized countries whereas it is still at a growth or maturity stage in a number of developing countries. Because it is heavily endowed with that factor, it will be most efficient at producing the good that requires that factor for production. Colonial powers restricted developmental activities in their colonies to a minimum infrastructure base that would support international trade for their own interests. This suggests that there must be something other than factor endowments motivating international trade.
Theories of absolute and comparative advantage lay emphasis on specialization with an assumption that countries are driven only by the impulse of maximization of production and consumption. This theory explains relative advantage of the countries based on the factor endowments. The major producer of Latin America is copper, oil, soy, and coffee, as the region produces about 47 per cent of the world soybean crop, 40 per cent of copper, and 9. Also, in the L-R commodity prices equal their costs, leaving no economic profit. As indicated in Table 2. The assumptions that drive the factor endowment theory may be flawed. Bangladesh has export competitiveness in readymade garments as the industry does not require much capital investment, and skills, not abundant therein.
Therefore, countries export those goods in which they have comparative advantage due to factors endowed Chart: principal exports of selected countries. On the other hand, Heckscher-Ohlin theory makes a positive contribution to economics. Trade theories also offer an insight, both descriptive and prescriptive, into the potential product portfolio and trade patterns. The existence of a comparative advantage is, in turn, affected by the abundance, productivity and , land and capital. Trade was considered to be a zero-sum game under the mercantilism theory wherein one country gains at the cost of the other.
Ohlin does recognise this point and concludes that, though, there are many such reasons for the international differences in the commodity prices, unequal factor endowments seem to be the predominant element in any explanation of the basis of international trade. A Distance Measure of Factor Abundance Factor abundance is a ratio that can be treated as a distance. Repetitive production of a product, which increases the skills of the labour force. United States and Canada's relatively equal distribution of wealth, amount of human capital and political power ultimately affected development of institution, extent of franchise, and public education that persist and influence growth of the country. The limitations of the theory of mercantilism are as follows: i. Governments use these reserves to intervene in foreign exchange markets and to influence exchange rates. Countries with abundant oil tend to export oil, focusing internal resources toward producing the factor they have in quantity.
This can also be explained by various types of similarities, such as cultural and economic, besides the cost of transportation. In his basic model, Ohlin assumes that relative factor prices would reflect exactly relative factor endowments. It can utilize the remaining 25 units of its additional resources for producing 6. Again, the open franchise was possible because the United States endowed a land suitable for wheat growing thus had a large body of middle class unlike Brazil and Cuba where they exhibited small elites, some overseers and large slave population. This article may require to meet Wikipedia's. Mercantilist policies were used by colonial powers as a means of exploitation, whereby they charged higher prices from their colonial markets for their finished industrial goods and bought raw materials at much lower costs from their colonies.
In the first approach, they formulate a model as close to the specifications of the theory as possible and estimate the model using real world data to determine the applicability not the accuracy of the theory. The second approach involves searching for model specifications that best explain observed trade. Coefficients of variation indicate a higher degree of variation than share abundance except for capital, clerical, and manufacturing labor. For example, some goods are labour-intensive, while some are capital-intensive. Countries with identical homothetic utility functions would consume products in the same ratio and export the product using their abundant factor intensively. However, the same logic applies even when the theories experimented with multiple-commodities and multiple-countries situations.
Critiques of the Factor Endowment Theory The factor endowment theory, while used to explain overarching notions of comparative advantage, in reality only accounts for a small percentage of world trade. Nonetheless, the New World economies inherited attractive endowments such as conducive soils, ideal weather conditions, and suitable size and sparse populations that eventually came under the control of institutionalizing European colonists who had a marginal economic interest to exploit and benefit from these new discoveries. While North America undoubtedly gained from this borrowing, this does not fully explain why the rest of the which also enjoyed a large factor endowment and access to British institutions did not develop in a similar way. The sizes of economy and production runs are not taken into consideration. The value of a factor of production forgone for its alternate use is termed as opportunity cost. A highly force is more expensive and more productive than an force.