Friday, August 28, 2009

Difference between Ohlin’s and Classical Theories of International Trade

Ohlin’s theory of international trade departs from the classical theory in the following respects.

1. It seeks to explain the phenomenon of international trade in terms of general theory of value rather than the labour theory of value.

2. Unlike the Classical theory, Ohlin’s theory asserts that there is no need for a separate theory of international trade.

3. Ohlin’s theory is a type of location theory and stresses the space of element. It is simply the multiple market theory of pricing. Hence it is more realistic than the highly abstract classical theory of comparative-costs.

4. Since Ohlin’s theory takes two or more factor of production into account, factor supply becomes crucial determinant of comparative advantages. In the Classical theory only one factor labour is considered, hence factor supply aspect is rendered irrelevant. Thus Ohlin’s theory integrates factor markets into international trade theory.

5. The Classical theory seeks to establish the welfare propositions of the international trade theory on the other hand Ohlin’s theory represents a contribution to positive economics. It attempts a scientific explanation of the structure of international trade.

6. The Classical theory laid emphasis on the quality of a single factor labour. On the other hand in Ohlin’s theory it is the quantity of all factors and not their quality in different regions which account for the emergence of international trade.

7. In the Classical theory Comparative advantage arises from superior skills or techniques. But this superiority may vanish when others have learnt the technique. Hence international trade will come to an end. But Ohlin’s theory asserts that international trade will always continue, because international trade arises from differences in relative commodity costs which are due to relative differences in factor prices and relative differences in factor prices and relative differences in factor requirements.

8. The Classical theory does not explain why there are difference sin comparative costs. But Ohlin’s factor-proportions analysis is able to do so.

9. Ohlin’s theory is based on differences in factor endowments in different countries as against the quality of one factor-labour in the classical theory. The former lays emphasis not only on the quality but also on the quantity of factors determining international values.

10. The Classical theory demonstrates the gains from trade between the two countries. This is related to the welfare theory. On the other hand Ohlin’s theory is scientific and concentrates on the basis of trade. It thus partakes of the positive theory.

11. According to Haberler the Ohlin’s theory is a location theory which highlights the importance of space factor in international trade while the classical theory regards the different countries as space less markets.

12. The Ohlin’s theory is explicitly based on the assumption of production functions of the two countries. On the other hand the Classical theory is based on differences in the productions of the trading countries.

13. The Ohlin’s theory is more realistic than the classical theory in that the former leads to complete specialization in the production of one commodity by one country and of the other commodity by the second country when they enter into trade with each other. By contrast the trade between two countries may or may not lead to complete specialization in the classical theory.

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