Introduction:

Bertin – Ohlin, in his famous book inter regional and international trade 1933 criticize the classical theory of international Trade and formulated General Equilibrium Theory called Modern Theory of International Trade or Heckcher- Ohlin theory. It was Eli Heckcher, Ohlin’s teacher, first propounded the idea of international theory in 1919 that trade results from differences in factor availability in different countries. Later on it was forwarded by Bertin Ohlin to make it as international trade. Thus it is called as Heckcher-Ohlin theory of international trade.

Heckcher-Ohlin Theory:

H. O. theory states that the main determinant of the pattern of production specialization and trade among regions is the relative availability of factor and factor prices. Countries are different in factors and factor prices. Some countries have much capital other have much labor. That theory now says that the countries that are rich in capital will export capital intensive foods and countries that have much labor will export labor intensive goods to Ohlin the immediate cause of international Trade always is that some commodities can be bought more cheaply from other regions where as the same region their production is possible at high price. Thus the main cause of trade between regions is the difference in prices of the products.

Assumptions:

• It is a two -by two- by two model there are two countries A and B and two commodities X and Y and two factors of production labor and capital.
• There is full employment of resources.
• There are quantitative differences in factor but qualitatively they are homogeneous.
• The production function of the two commodities has different factor intensive that is labour intensive and capital intensive.
• There is a perfect mobility of factors within each region but internationally they are immobile.
• There is no transport cost.
• There are constant returns to scale in the production of each commodity in each region.
• Taste and preference of consumer and the demand patterns are identical in both countries.
• There is no change in technology knowledge.

Given this assumptions Huckster and Ohlin contend that the immediate cause of international Trade is the different in relative commodity prices caused by differences in relative demand and supply of factor as a result of differences in factor endowments between two countries. Fundamentally the relatives’ scarcity of factors, the shortage of supply in relation to demand is essential for between two countries.

The H.O Theories is explained in terms of two definitions:-

• Factor prices
• Factor availability

The theory explains if capital is relatively cheap in country A. The country is abundant in capital and if labor is relatively cheap in country B the country is abundant in labor. Thus country A will produce and export the capital intensive and import the labor intensive goods and country B will produce and export labor intensive food and import the capital intensive goods.

Then if a country A is relatively capital abundant and country B is relatively labor abundant than measure is physical amount of the total amount of capital and total amount of labor. This is explaining in the production possibility curve. PPC is a method used to describe how two commodities are related to each other in terms of ability to produce both within an economy. It means the maximum possible output for two products when there are limited resources.

also read: explain the comparative cost theory of international trade.