Modern Theory of International Trade


The international business world is experiencing globalisation. Countries are now interacting with each other in terms of trading and economic development. So, what exactly is International Trading? In simple terms, International Trading refers to the exchange of Goods and Services between countries. So why would countries do that? Well the answer is simple countries trade with each other when they do not have the resources to satisfy their own needs and wants.

International trade is the foundation to business world where countries send and receive goods and services depending on their abundance or scarcity. That is where the terms Export and Import come into the picture. International Trade allows countries in the world to make the best possible use of the resources available to them.

Let’s look at a popular theory of International Trade called the Modern Theory of International Trade.

The Modern Theory of International Trade was developed by two economist Eli Hecksher and Bertil Ohlin from Sweden at the beginning of the 20th Century. This theory is also referred to as the Hecksher- Ohlin Model.

What does this Modern Theory of International Trading explain?

The Modern Theory of International Trading helps us to predict a countries pattern of trade based on its endowment of factors of production. So, what is a countries pattern of trade? Its basically a countries composition of Exports and Imports. The endowment of factors of production is what kind of factors of production does a country have? Does it have labour or Capital and in what proportion? It has a lot of labour or a lot of Capital.

The Modern Theory of International Trade states “that a country will export goods that are intensive in its relatively abundant factor and will import goods that are intensive in its relatively scarce factor”.

So, in simple terms it means that a country would like to export their surplus and make money of it and on the other hand would like to import goods which they have but are limited in supply. A capital abundant country is one which has more capital per labour and vice a versa is true for a labour abundant country. Usually developing countries are more labour abundant countries where labour is cheaper and easily available and Developed nations are Capital abundant where capital is abundant and cost of manufacturing is high as the labour is expensive or not easily available.

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