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Modern Theory of International Trade by Bertil Ohlin

Bertil Ohlin’s Theory of International Trade, now dubbed as the Modern Theory of International Trade, has been greatly supported by the modern economists. According to them, Ohlin’s theory presents a more realistic, more national and a more direct explanation of the phenomenon of international trade. Ohlin’s theory is essentially an expansion of the new generally acceptably theory of value known as the general equilibrium or mutual interdependence. The theory explains how the values of commodities are related to each other in the local market.

Ohlin has extended this general equilibrium theory to international trade. In his theory, he has contended that the general equilibrium theory, applicable to inter-regional trade with a country can be successfully applied to trade between two countries. He strongly supported that there was no need for developing a separate theory for international trade because international is nothing but a special case of inter-regional or inter local trade. In his words international trade is but a special case of inter-local or inter-regional trade.

 In his opinion, there are no fundamental differences between internal and international trades. International trade is simply an expansion of inter-regional or inter-local trade within a country. He has defeated the arguments put forward by the classical economists in favor of a separate theory of international trade.

 According to him, (i) the factors of production can be immobile even within a country, and (ii) the principle of comparative advantage is also valid even for inter-regional trade because inter-regional trade is also due to comparative cost advantage.

General Equilibrium Theory Of Value:

According to the theory, the quantities in involved in valuation,-namely, the prices of finished goods, consumers’ income, the demand and supply of finished goods and the demand and supply of factors of production are inter-dependent and inter-related. These all factor& constituted a complex group of interacting and intimately inter-related forces, which taken all together mutually determine each other. No Single agent can be given any priority over other. – Each is relevant in the total situation along with others. This explanation of prices is referred to as the general equilibrium theory of value.

Modern Theory Of International Trade:

Different regions even within a county are not equally rich in natural and human resources. Each region, therefore, specializes in the production of those commodities which are best suited to it and it then exchanges those commodities for other commodities from other regions of the country in which those regions are better suited.

Bertin Ohlin has pointed out that variation in productive factors is a cause of inter-regional trade and specialization just as differences in human abilities and aptitude the cause of exchanges between individuals. The variations in productive factors (or the factor-endorsement) cause differences in prices in different countries and price differences are the cause of international trade.

In the words of Elsworth, “The immediate cause of inter-regional trade in goods is to be found in price differences. In other word inter-regional or international trade is a price phenomenon.” As established by the theory, price differences are the cause of international trade. But now the question arises, under what Circumstances do the relative prices of the commodities in two countries differ. The simple answer to the question is that demand and supply of a commodity in two regions (or countries affect the relative prices of the commodity in two countries. The demand for a commodity depends on (i) consumers’ wants (ii) consumers’ which depend upon the conditions of ownership of factors of production. The supply of commodity depends upon (i) Supply of productive factors, and (ii) technical conditions of production.

According to the Ohlin, technical conditions of production are more or less similar in all the countries therefore; such conditions should not be considered. Consequently, the differences in prices are attributable to (i) consumers’ wants, and (ii) consumers’ income, the demand and supply of productive factors. Thus Bertil Ohlin’s conclusions on the theory of international trade can be summarized as follows.

  • The immediate cause of inter-regional or international trade is the differences in relative commodity prices in the two regions or countries.
  • The differences in relative commodity prices are due to the relative scarcity of factors of production in two regions or countries.
  • In international trade implies an exchange of abundant factors for scantily supplied factors. The movement of goods from one region or country to other region or country takes place only because there is scarcity of factors in one region which results in on higher prices for those factors in that region. This phenomenon attracts the productive factors from the abundant region to the scarcity region.

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