Bertil ohlin


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Bertil Ohlin, Economics, Heckscher–Ohlin theorem

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Bertil ohlin

  1. 1. Bertil Ohlin<br />The student of Eli Heckscher<br />The Nobel Prize Winner<br />With Special Reference To <br />“Interregional and International Trade”.<br />Presented By:-<br />Ajay umarAmandeep Singh<br />KabirSandhuSandeep Singh Grewal<br />
  2. 2. AKA Bertil Gotthard Ohlin<br />Born:  23-April-1899<br />Birthplace:  Klippan, Sweden<br />Died: 3-Aug-1979<br />Location of death: Vålädalen, Sweden<br />Cause of death: unspecified<br />Gender: Male<br />Race or Ethnicity: White<br />Occupation: Economist <br />
  3. 3. Childhood<br />Ohlin was born into an upper-middle class family in a village in the South of Sweden in April, 1899.<br />It was a large family with seven children, a large house and a home which was very hospitable and open to friends and relatives<br />
  4. 4. Early Education <br />There was a private school which was not very particular about the knowledge entering children had acquired.<br /> Normally, they should have had three years of preparatory studies but many of the children had only two years. <br />
  5. 5. Cont/……<br />Ohlin was given only a little private teaching and prep. school for one year before entering the school at the age of seven.<br /> Hence, he passed the "baccalaureat" in the classical line in the city of Hälsingborg rather early.. <br />
  6. 6. The journey of the economist<br />As mathematics had been his best subject at school, his parents proposed – and he accepted - studies at the University of Lund in mathematics, statistics and economics<br />The choice of the latter subject is said to be due to the fact that at the age of five years, he was very fond of calculating the cost of the various cakes his mother used to bake.<br />
  7. 7. Year:-1917<br />After two years, Ohlin obtained the degree of fil. kand. with the highest mark in “Economics”.<br /> His teacher, Professor “SmilSommarin”, was a fine pedagogue, a very generous person and a great admirer of “Kurt Wicksell”.<br />
  8. 8. Finding Of A true Teacher<br />Having seen in a newspaper a review of a book about the “Economic aspects of the world war” - written by professor “Eli Heckscher”, who was professor at the “Stockholm Business School” – he suggested to his parents, that he should take up studies there. <br />
  9. 9. Heckscher’s Teaching Method<br />Great<br />Helpful & friendly. <br />With the aid of differential calculus he solved a fairly obvious profit-maximization problem.<br />
  10. 10. Life After Graduation(A comparison among Teachers)<br />Ohlin moved to the philosophical faculty of Stockholm University where his teachers were Gustav Casseland GöstaBagge<br />Cassel andBagge were not quite so stimulating lecturers as Heckscher<br />But they sacrificed a great deal of time for private discussion, which was exceedingly fine teaching.<br /> Like Heckscher, they did not discuss his thesis before its first version was ready.<br />
  11. 11. Learning And Earning<br />Bertil Ohlin took up work for the “State Tariff Committee”. <br />
  12. 12. A Stimulating Club<br />1918:- He became a member of the "Political Economy Club" which had been created a year before.<br />This was a small gathering of trained economists who were interested in scientific work in economics.<br />
  13. 13. A Stimulating Club<br />Important members:-Heckscher, Cassel, Gosta, Professor Sven Brisman, Knut Wicksell, David Davidson and half a dozen "docents" were members<br />The total membership was about 20 of which 4 were graduate students. One of the latter was Per Jacobson who later became head of the International Monetary Fund. <br />
  14. 14. Year:-1919<br />He presented a paper on the theory of inflation in the “Political Economy Club” which differed from that of CasselandWicksell. <br />It said:- “Even in a state of balance between total demand and supply - the volume of purchasing power could rise when some prices go up.”<br /> “Consequently, the fact that a limitation of supply during the war could lead to higher prices of many commodities would not automatically bring about a fall in the prices of other commodities.” <br />
  15. 15. Year:-1920<br />Ohlin served for one year as assistant secretary to the “Economic Council” which, under the “chairmanship of the Minister of Finance”, included nine economic leaders from banking, industry and agriculture, and Gustav Cassel as representative of economic science.<br /> One of the bankers was Mr. Marcus Wallenberg, who played a great role in Sweden's economic life.<br />
  16. 16. Year:-1921-1922<br />One year of military service in the Navy.<br />Three months studies at Grenoble, France, in friendliness of the teachers and many other local people.<br />1922:-He presented his thesis about “international trade theory” to “Gustav Cassel” to obtain the degree  “licentiatusphilosophiae”. <br />
  17. 17. Visits to the Two Cambridges<br />1922:-Bertil Ohlin got a small stipend from the Swedish-American Foundation and went to Cambridge, England, for a few months and thereafter to Harvard University. <br />
  18. 18. Year:-1924<br />Ohlin completed his “doctor's thesis” in 1924 from the University of Stockholm<br />His thesis was based on “international trade theory” .<br />
  19. 19. International trade problem<br />He soon found that the approach in Heckscher's pioneer paper on “The Influence of Foreign Trade on the Distribution of Income (1919)” could profitably be used in a mutual interdependence price system for a realistic analysis of international trade by analyzing facts behind the differences in comparative costs<br />
  20. 20. Difference in opinion<br />While Heckscher regarded his reasoning as a kind of supplement to the classical comparative cost analysis, Ohlin insisted on the use of a consistent reasoning in terms of prices. <br />Thereby, the price system of the different national economies could be joined together and the trade between them.<br />
  21. 21. Cont/....<br />He sent a paper containing a brief version of his thesis to Professor Edgeworthwho was then co-editor with Keynes for the Economic Journal.<br /> It presented equation systems as a basis for an analysis of the causes and effects of international trade<br />
  22. 22. Cont/...<br /> At that time, equations were not so popular as diagrams.<br />Edgeworth sent his paper to Keynes and asked for his opinion. <br />Keynes wrote on a piece of paper via Edgeworth back to him: "This amounts to nothing and should be refused. J.M. Keynes."<br />
  23. 23. Five Years in Copenhagen<br />By Christmas time, 1923, Heckscherhad written, telling Ohlin that the chair in economics which had been held by the famous statistician HaraldWestergaard in the University of Copenhagen was open for applications. <br />HE hinted him to apply for the post.<br />
  24. 24. The Danish universities have a system of arranging a "competition" when there are different applicants and no one is clearly superior.<br />Two Danes, one Norwegian and two Swedes - the other one was Erik Lindahl- were given three months to write a thesis on "the economic effect of the 48 hours week"<br />
  25. 25. They also had to give a lecture on "guild socialism" after 48 hours preparation, and two lectures on a freely-chosen subject, which, in my case was "Monetary Stabilisation".<br />
  26. 26. Result of the competitionyear:-1925<br />A majority of the seven judges voted for BertilOhlin, the minority for Erik Lindahl. <br />So Bertil Ohlin was appointed and took up his new duties in Copenhagen in January 1925.<br />
  27. 27. Year:-1928<br />Ohlin sent a version of “LOCATION THEORY” to Harvard in the competition for the David Well's prize. <br />The prize was granted to another economist but that authority was willing to print his long manuscript in the  “Harvard Economic Studies”. <br />
  28. 28. Writing of a book<br />The book on “interregional and international tarde” was finished in January 1931, when he had returned to Sweden as successor to Heckscher in the Stockholm School of Business. <br />But after a lots of critical evaluation the book was released in Spring 1933. <br />
  29. 29. Specialty of the book<br />The book was characterized by an attempt to pay more attention to how “factor supply reactions”, “location”,“taxation”,“social policy”, and riskaffect international division of labour.<br />The static factor proportion model was only a beginning.<br />
  30. 30. Lectures Delivered<br />From January to the end of August 1931 he was busy at “Geneva” making a report about "The Course and Phases of the World Economic Depression". <br />He also gave a lecture on a “combined deficit financial policy and monetary policy as a remedy for the world depression” at the Nordic Economic Conference in June 1931.<br />
  31. 31. Monetary Theory and Employment<br />Bertil Ohlin concentrated on his attention chiefly on monetary theory and economic expansion. <br />He tried to construct a model for “an analysis of a process of expansion in a state of large unused resources”. <br />After writing some papers in the  “EkonomiskTidskrift”  he finished his report on “measures against unemployment” in the spring of 1934.<br />
  32. 32. Lecture in Cambridge:-1936<br />The offer for the lecture gave Ohlin an opportunity to summarize the Swedish theory and make some comparisons with Keynes' work. <br />A considerable part of the lectures was published in the  “Economic Journal”, 1937, under the title, ”The Stockholm Theory of Saving and Investment”. <br />
  33. 33. Year:-1938<br />Ohlin became a member of the Swedish Riksdag. <br />The unlimited scope in politics during world war – II attracted him towards politics.<br />
  34. 34. Lectures in universities<br />lecture at Columbia University in Jan. 1947. <br />A somewhat modified series of lectures was given at Oxford in the autumn of the same year.<br /> The lectures were published in 1949 under the title, “The Problem of Employment Stabilization”.<br />
  35. 35. Political Activity<br />Ohlin became leader of the Liberal Party from 1944 - and for the rest of the war, a member of the government .<br />He continued to teach from 1945 to 1965 and remained party leader until 1967. <br />From 1946 until his resignation from the leadership, the Liberal Party was the leading opposition party<br />
  36. 36. Cont/-...<br />During the greater part of the time as party leader, he contributed articles to one or two leading Swedish newspapers. <br />All in all he published about 1200newspaper articles in the years 1919-1977, of which around 700 appeared in the years from 1931 to 1943.<br />
  37. 37. Work after retirement<br />Bertilohlin left the Riksdag in 1970<br />Ohlin then wrote newspaper articles based on some research into “monetary theory” and “the distribution of income” as well as "inflation-protected taxation" and “international economic problems”.<br />
  38. 38. Nobel Symposium<br />1974:-Nobel foundation decided to add a symposium in economic science to the symposia in natural sciences, international peace problems, and literature which had been organized in the preceding decades. <br />
  39. 39. Cont/-...<br />The "Prize Committee" in economic science decided to choose as subject,  “The International Allocation of Economic Activity”. <br />As chairman of the organizing committee, Bertil Ohlin was grateful for the friendly reception of their invitations. <br />
  40. 40. Nobel prize<br /> Oct 14, 1977 - STOCKHOLM, Sweden :-The 1977 “Nobel Economics Prize” was awarded to James Meade of England and Bertil Ohlin of Sweden for their contributions to the theory of “International trade and international capital movements." <br />
  41. 41. Important works of OHLIN<br />The Course and Phases of the World Economic Depression (1931)<br />The German Reparations Problem (1930)<br />Protection and Non-Competing Groups (1931)<br />Interregional and International Trade (1933)<br />Mechanisms and Objectives of Exchange Controls (1937)<br />
  42. 42. Cont/...<br />The Problem of Employment Stabilization (1949)<br />The Equilibrium Rate of Exchange (1921)<br />Theory of Trade (1924)<br />Equilibrium in International Trade (1928)<br />The Reparation Problem: A discussion (1929) Bertil Gotthard Ohlin shared the 1977 Nobel Prize for Economics with James Meade<br />
  43. 43. Books by Bertil Ohlin<br />Problem of Employment Stabilization<br />The future of the world price level,<br />Interregional and International Trade<br />
  44. 44. Interregional And International Trade<br />It is this expanded theory of Ohlin on “foreign trade” which became popular in economics as the “Hecksher-Ohlin” model.<br />
  45. 45. 1 Introduction<br />We will study:-<br /><ul><li> Assumptions of the H-O theory
  46. 46. Factor intensity and factor abundance
  47. 47. H-O model
  48. 48. Effect of international trade on factor earnings and income distribution
  49. 49. Empirical test of H-O model</li></li></ul><li>2.Assumptions of H-O Theory<br /><ul><li>2x2x2 model
  50. 50. Same technology
  51. 51. X is L-intensive and Y is K-intensive
  52. 52. Constant returns to scale
  53. 53. Incomplete specialization
  54. 54. Equal tastes
  55. 55. Perfect competition
  56. 56. Internal factor mobility
  57. 57. No transportation costs
  58. 58. All resources are fully employed
  59. 59. Exports equal imports.</li></li></ul><li>3 Factor Intensity<br />If the capital-labor ratio (K/L) used in the production of Y is greater than the capital -labor ratio (K/L) in the production of X, commodity Y is capital intensive.<br />It is not the absolute amount of capital and labor used in the production of commodities, but the amount of capital per unit of labor (K/L).<br />
  60. 60. 3.1 Factor Intensity<br />
  61. 61. 3.2 Factor Abundance<br /><<br /><<br />Nation 1 <br />TK/TL<br />Nation 1 <br />TK/TL<br /> Nation 2 <br />TK/TL <br />Nation 2 <br />TK/TL <br /><ul><li>In Physical Units</li></ul>In Relative Factor Prices<br />PK/PL <PK/PL <br /> In terms of physical units, the definition of factor abundance considers only the supply of factors. But in terms of relative prices, the definition considers not only the supply of factor but also the demand for factor.<br />
  62. 62. 3.3 Factor Abundance and the Shape of the PPF<br />
  63. 63. 4 Heckscher-Ohlin Theory<br /><ul><li>H-O theorem:-</li></ul>It deals with and predicts the pattern of trade.<br /><ul><li>Factor price equalization:-</li></ul>It deals with the effect of international trade on factor prices.<br />
  64. 64. 4.1 H-O Theorem<br />A nation will export the commodity whose production requires the intensive use of the nation's relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation's relatively scarce and expensive factor.<br /> The relatively labor-rich nation exports the relatively labor-intensive commodity and imports the relatively capital intensive commodity.<br />
  65. 65. 4.2 Factor Endowments<br /> Of all the reasons for differences in relative commodity prices and comparative advantage among nations, the H-O theorem isolates the difference in relative factor endowments among nations as the basic cause of comparative advantage and international trade. For this reason, the H-O model is often referred as the factor-proportions or factor-endowment theory. <br /> Each nation should specialize in the production of and export the commodity intensive in its relatively abundant and cheap factor and imports the commodity intensive in its relatively scarce and expensive factor.<br />
  66. 66. 4.3 Illustration of H-O Theory<br />
  67. 67. 4.4 General Equilibrium Analysis<br /> It discusses all economic forces that jointly determine the price of the final commodities.<br />Which is the most important for trade? THE SUPPLY OF FACTORS !<br />
  68. 68. 4.5 Illustration of H-O Model<br />
  69. 69. Explanation<br />Autarky –Nation 1 produces @A and more of X-Labour intensive good<br />-Nation 2-produces at A’ and more of Y capital intensive good<br /><ul><li>IC 1 passes thru A&A’
  70. 70. PA less than PA’
  71. 71. With trade
  72. 72. Nation1 specialises in X and moves from A to B
  73. 73. Nation2 specailises in Y and moves from A’ to B’</li></li></ul><li>Cont/-...<br /><ul><li>Therefore Nation 1 will export BC of X and Inport C’B’ of Y
  74. 74. New IC both nations will benefit.
  75. 75. If ratio of Px/Py greater than Pb then Nation 1 wants to export more of commodity X than what Nation2 wants at a higher relative priceof X and then Px/Py falls toward Pb</li></li></ul><li>5.Factor-Price Equalization<br />International trade will bring about equalization in the relative and absolute returns to homogeneous factors across countries<br />International trade will cause the wages/return of homogeneous labour/capital- relative and absolute wages and return will be equal.<br />A labour intensive nation will produce more of X and therefore DD for labour increases raising wages and decreasing interest.<br />
  76. 76. 5.1 Illustration of Factor Price Equalization<br />
  77. 77. F-E<br />Shows that w/r1 and w/r2 will move towards w/r* as more labour is demanded in Nation 1 and as more capital is demanded in Nation 2<br />
  78. 78. 5.2 Absolute Factor Price Equalization<br /> Equalization of absolute factor prices means that free international trade also equalizes the real wages for the same type of labor in the two nations.<br /> Given that trade equalizes relative factor prices, that perfect competition exists in all commodity and factor markets and given the additional assumption that both nations use the same technology and face constant returns to scale in the production of both commodities, trade will also equalize the absolute returns to homogeneous factors.<br />
  79. 79. 5.3 Effects of Trade on the Distribution of Income<br /> Trade increases the price of the nation’s abundant and cheap factor and reduces the price of its scarce and expensive factor. Trade causes the real income of labor to rise and the real income of owner of capital to fall in nation 1. Trade also causes the real income of labor to fall and the real income of owners of capital to rise in nation 2.<br />
  80. 80. Cont/-...<br /> In developed nations, capital is relatively abundant, int’l trade will reduce the real income of labor and increases the real income of capital owners. in LDCs, labor is relatively abundant, international trade will increase the real income of labor and reduce the income of capital owners.<br /> Should developed nations restrict trade? and why?<br />
  81. 81. 5.4 The Specific-Factor Model<br />X<br />L-intensive<br />Y<br />K-intensive<br />Capital 1<br />(Land)<br />Labor<br />Capital 2<br />(Machines)<br /> The specific factors model was developed by Paul Samuelson and Ronal Jones. It assumes an economy that produces two goods and allocates its labor supply between the two sectors.<br />
  82. 82. 5.5 Patterns of Trade with Specific Factor Model<br /> With the opening of trade, the labor abundant nation will specialize in the production of and export commodity X (the labor intensive commodity) and import commodity Y (the specific capital-intensive commodity). <br /> This will increase the relative price of X (i.e., Px/Py) and the demand for labor and the nominal wage rate of labor in the nation. Some labor will move from the production of Y to the production of X. <br />
  83. 83. Cont/-...<br />Since labor is mobile between the two industries, industry Y will have to pay the higher going nominal wage rate for labor in order to keep workers even while facing a reduction in Py/Px and the transfer of some of its labor to the production of X.<br />
  84. 84. 5.6 Effect of Trade on Labor<br />The effect of this on the real wage rate of labor in the nation is ambiguous (not clear). <br /> The reason is that the increase in Px/Py and in the derived demand for labor will be greater than the increase in the nominal wage rate, and so the real wage rate of labor, w/Px, falls in terms of X. <br />
  85. 85. Cont/-...<br />On the other hand, since the nominal wage rate increased but the price of Y declined, the real wage rate increased in terms of Y, w/Py. Thus, the real wage rate in the nation falls in terms of X but rises in terms of Y. The effect on the real wage of labor is, therefore, ambiguous. <br />
  86. 86. 5.7 Effect of Trade on Capital<br />The result for specific capital is clear. <br /> Since capital is specific to each industry, opening trade does not lead to any transfer of capital from the production of Y to the production of X in the nation. With more labor used and with the increased demand for the specific capital(land) in the production of X, the real return on capital, K1 or land, in the production of X rises. <br />
  87. 87. Cont/-...<br />On the other hand, with less labor used with the same amount of specific capital, K2, in the production of Y, the real return on the specific capital(machines) used in the production of Y falls.<br />
  88. 88. 5.8 Conclusion to the Model<br /> Trade will have an ambiguous effect on the nation's mobile factors, benefit the immobile factors specific to the nation's export commodities or sectors, and harm the immobile factors specific to the nation's import-competing, commodities or sectors. <br />
  89. 89. 5.9 Empirical Relevance<br /> Has international trade equalized the returns to homogeneous factors between nations? Why?<br /> Many of the assumptions do not hold in the real world. <br />
  90. 90. Reason <br />The fact is that international trade has reduced, rather than completely eliminated, the international difference in the returns to homogeneous factors.<br /> Many other forces were operating at the same time, preventing from equalization. For example, technologies develop more rapidly in the United States than in Egypt.<br />
  91. 91. Sources:-<br />Bertil Ohlin: critical assessments By John Cunningham Wood<br /><br /><br /><br />