Heckscher-Ohlin's Theory of International Trade and its Evaluation

Many theories in literature illuminate the international trade patterns of nations. Over time, economists have developed theories to explain the mechanisms of international trade. They are categorised into classical and modern theories of international trade. The classical theory of trade is based on the labour cost theory of value. These theories are from the perspective of a country. The classical theory of comparative advantage explains that trade can occur because of differences in the productivity of labour between countries (Salvatore, 2004). However, this theory does not explain the causes of the difference in productivity. The Ricardian model of comparative advantage explains much of world trade from Roman times to World War II. During the World War, the nations were agricultural economies with a small manufacturing sector. Grains were exported from Egypt and Gold and silver were mined in most European countries. These precious metals were exported to China to pay for Rome's imports of ceramics and silk. The Ricardian model is more relevant to the world economy before World War II. Modern trade theories are firm-based theories. Both of these categories, classical and modern, consist of several international trade theories. The Heckscher-Ohlin theory of comparative advantage was produced as an alternative to the Ricardian model of comparative advantage. It is also categorized under classical trade theories. The present paper focuses on the development and evaluation of the Heckscher-Ohlin theory of international trade.