India has an absolute advantage in production of both cloth and wheat. Note: Slopes are not equal y x Labour required for one unit of cloth Labour required for one unit of wheat Figure . America India - - International Economics However, India should concentrate on the production of wheat in which she enjoys a comparative cost advantage. ( / < / ).
For America the comparative cost disadvantage is lesser in cloth production. Hence America will specialize in the production of cloth and export it to India in exchange for wheat. (Any exchange ratio between . units and .
units of cloth against one unit of wheat represents gain for both the nations). With trade, India can get unit of cloth and unit of wheat by using its labour units. In the absence of trade, for getting this benefit, India will have to use units of labour. America also gains from this trade.
With trade, America can get unit of cloth and one unit of wheat by using its units of labour. Otherwise, America will have to use units of labour for getting unit of cloth and unit of wheat. Criticisms . Labour cost is a small portion of the total cost.
Hence, theory based on labour cost is unrealistic. . Labourers in different countries are not equal in efficiency. .
. . Modern Theory of International Trade Introduction The modern theory of international trade was developed by Swedish economist Eli Heckscher and his student Bertil Ohlin in . This model was based on the Ricardian theory of international trade.
This theory says that the basis for international trade is the difference in factor endowments. It is otherwise called as ‘ Factor Endowment Theory’. The Theory The classical theory argued that the basis for foreign trade was comparative cost difference and it considered only labour factor. But the modern theory of international trade explains the causes for such comparative cost difference.
This theory attributes international differences in comparative costs to: i) difference in the endowments of