Post-Heckscher-Ohlin Theories

New international trade theories: They are mostly referred as Post-HeckscherOhlin Theories because they were developed after the Heckscher-Ohlin Theory.

New international trade theories,in other words post- Heckscher-Ohlin theories, do not reject the Heckscher-Ohlin Theory. They improve it as of complementary trade theories.

The most important complication is that we cannot nominate the commodities as labor-intensive or commodity intensive since we have more than two factors of production. In this case, we have to use an index in order to determine the factor-intensity. Nevertheless, the extension of the model leaves the Heckscher-Ohlin Theory still valid as long as the number of commodities is equal to or more than the number of factors of production.

This assumption acknowledges that there is no factor-intensity reversal. Factorintensity reversal is a factor that makes the Heckscher-Ohlin Theory invalid. Even though the studies show that the factor-intensity reversal rarely occurs, it is still an element that might impede the Heckscher-Ohlin Theory.

In the real world, it is not that easy to identify factor endowments of the countries. Since countries use more than two factors of production, it is impossible to find out the relative factor prices that are the determinants of the factor endowments without using factor price index.

1. Two countries, two commodities and two factors of production
2. One of the commodities is labor-intensive and the other one is capital-intensive in both countries
3. One of the countries is labor-abundant and the other one is capital-abundant
4. Technology is the same in both countries
5. There is constant returns to scale in the production of both commodities
6. There is incomplete specialization in the production in both countries
7. Demand preferences are the same in both countries
8. There is perfect competition in the commodities and the factor markets in both countries
9. There is free movement of factors of production within each country but no free movement of factors of production between countries
10. There is free trade between the trading countries

The most referred demand oriented model of international trade is the Overlapping Demands Model. The Model was developed by the Swedish economist Staffan Linder in 1961. Representing the name of the economist, the Overlapping Demands Model usually entitled as Linder Model.

According to Linder, Heckscher-Ohlin Theory explains international trade in primary goods like natural resources and agricultural commodities but does not shed a light on international trade in manufactured commodities. Linder states that the driving force of international trade in manufactured commodities is the domestic demand conditions.

Linder Model postulates that much of the current international trade involves trade in manufactured commodities, and demand conditions constitute a big importance in explaining international trade patterns. According to Linder, firms within a country produce commodities for the domestic market, and they are motivated to produce more when the market is enlarged. Thus, it is the domestic market that determines the commodities in which the country specializes. In this respect, the country has a comparative advantage in the manufactured commodities that it produces for the domestic market.

Income elasticity of demand: It is the degree of responsiveness of demand for a commodity or a service against a change in income, provided that all other things remain the same.

The formula that is used to calculate the income elasticity of demand is;

Income elasticity of demand = Percentage change in quantity                                                    demanded  

                                              ________________________

                                              Percentage change in income

1. Income elastic demand
2. Income inelastic demand
3. Inferior goods

The phenomenon of having both comparative advantage and disadvantage within the same commodity is possible today along with product differentiation. Thus, there are new international trade models that explains international trade based on product differentiation.

Product differentiation: Producing a commodity slightly different from the commodity produced by the competitor is called product differentiation

Effects of technological differences on international trade are best explained by the Product Cycle Model.

This model regards technological innovation as the key determinant of the pattern of trade within the manufactured commodities trade.

Product Cycle Model was developed by Raymond Vernon in 1966. Essentially, it is successor of the Imitation Lag Hypothesis that was introduced by Michael V. Posner in 1961. In other words, Imitation Lag Hypothesis paved the way for a more detailed model of Vernon, called Product Cycle Model .

1. New-product stage
2. Product-growth stage
3. Product-maturity stage
4. Product-standardization stage
5. Product-decline stage

The first stage is called new-product stage in which the product is produced and consumed only in the innovating country with skilled labor and high technology. The new-product stage is referred as 0X time frame on the horizontal axis. In the new-product stage, production is made only for the consumers of the innovating country with a small scale. There is no international trade in this stage.

In this stage, production is increased in order to meet the rapidly increasing demand. In the product-growth stage, imitating country starts to demand the new product. Due to newly commencing foreign demand and domestic demand since its innovation, total demand for the new product rapidly rises. In this stage, production is performed only in the innovating country.

The Product Cycle Model depends on the dynamic comparative advantages.

It is a type of competitiveness that equips a commodity or a service with competitiveness among the producers of substantially similar products on the basis of respective pricing

It is a type of competitiveness that equips a commodity or a service with competitiveness among the producers of substantially similar products on the basis of brand perception

It refers to the same amount of output increase with the increase within the factors of production.

Economies of scale exist when the increase in the output is proportionally more than the increase in the input.

Economies of scale are also referred as increasing returns to scale or positive economies of scale.

It refers to a reduction in the average cost of a firm that is peculiar to the increase within the scale of the firm itself.

It refers to a reduction in the average cost of a firm in conjunction with the increase within the size of the industry.

Market type of an industry in which there are external economies of scale can be perfect competition.

Market type of an industry in which there are internal economies of scale can be imperfect competition.

Monopolistic competition: Within a monopolistic competitive market, there are many firms producing differentiated commodities. They are competing with each other on the basis of commodity quality, price, and marketing. It’s easy for the firms to enter in and exit out from the market.

Intra-industry trade occurs when a country exports and imports with the same commodity category or industry as a whole