Using the Heckscher-Ohlin model of trade, and assuming the following: Australia

Question

Using the Heckscher-Ohlin model of trade, and assuming the following:

Australia is relatively more endowed with land (N)

India is relatively more endowed with labour (L)

Wheat is a relatively N-intensive good

Textile is a relatively L-intensive good

Tastes and preferences in Australia and India are identical.

1) Would the Linder’s hypothesis provide a convincing explanation for the pattern of international trade in wheat? Explain why or why not?

2)Why were Leontief’s findings considered paradoxical to the HO model of international trade? Explain.

Explanation / Answer

HO theory of international trade assumes that capital rich country will export capital-intensive goods and labour rich country should specialise in labour-intensive goods this is the base for the international trade.In other words trade between the countries take place due difference in factor endowments( Capital and Labour)

On the other hand, Linder Hypothesis states that even trade between similar endowment also possible it arises due similar taste and preference between the countries. here trade arises between the country similar demand pattern a country is importing because of consumer demand in home.

Above example, Australia and India are different income group country and trading to each other because of same identical taste and preference.

2) W Leontief in his empirical study showed in the USA, showed that the USA being capital rich country exports labour intensive goods and imports capital-intensive goods this study showed the invalidity of the HO theory thus this study popularly known Leontief paradox.

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