Question 21. Explain the factor endowment theory of trade.
Answer 21. FACTOR ENDOWMENT THEORY /OHLIN/ MODERN THEORY / RELATIVE THEORY / FACTOR PRODUCTION THEORY.
Heckscher Ohlin trade will take place on the basis of reserve of factor of production. Labour intensive technology or capital intensive technology. A country will export those commodity in which that country has more reserves either factor of production needed for that commodity or raw material etc.
ASSUMPTION
1. It is 2×2×2 model .
2. There is a full employment of resources.
3. There is a perfect competition in commodities as well as in factor market.
4. There are quantitative difference in factor endowment in different countries.
5. There are constant return to scale in production in each commodities in each countries.
6. There is a free unrestrictive trade between the country.
CRITICISM
1. This theory is static in nature.
2. Ohlin theory is not free from constraints thus it is a restrictive one.
3. There is a absence of perfect competition in this theory.
4. Ohlin theory is based on the realistic assumption of full employment level so there is no unemployment .
5. It focuses on capital as an Endowment.