The document discusses the development of a new theory based on the Heckschers-Ohlin theory in the context of international trade and its effects on an economy transitioning from closed to open. It highlights how trade influences factor returns, production ratios, and the relative price of exported commodities, particularly wheat. Additionally, it addresses criticisms of the theory and the implications of tariffs on income distribution and trade dynamics.

1. S
S
T
1

2. DEVELOPER
S
Studied Heckcsher Ohlin Theory and developed a new theory

4. 4
ASSUMPTI
ONS

5. 5
Ctn…

6. An economy move from
closed economy to
open economy
6
wheat)-
raises the returns to factors used
intensively.
watch)-
falling the returns to factors
used intensively.

7. 7
Box diagram

8. 8
• OO1 is contract curve
• a1a1 &b1b1 is Iso-quants of W & W’
• M – production situation before trade
• The factor price ratio is represented by the slop of tangent
p1p1 at M ( Pw/Pw’)
• Trade started
• The country will export W , so that it moves along the
contract curve from M to N
• Now the country increases the proportion of L to K in the
production of W
• But the total proportion is remain unchanged
• It is bcz of fixed SS of factors and fully employed factors

9. 9
International trade tends to increase the relative price of the export commodity W.

10. 10
 PC – Production Possibility Curve
 The pre-trade situation is M (same point in the box diagram)
 P1P1 is the price ratio
 After trade situation is N
 The price of Wheat has increased relative to Watch
 Wheat production expands in the country and reduce Watch
production
 DD for L in Wheat industry increased. But Watch industry will
release only more K and less L
 This will leads to the substitution towards the use of relatively
more K & less L in both industries
 It is not possible to maintain the DD for L in Wheat prdcn

11. 11
 Reward is based on Marginal Productivity.
 So Real Wage increases & Interest Rate will
fall
 Thus MP of K at point N is lower than that of MP
of K at point M
 Slope of Price line pp is steeper than slope
of Price line p1p1
In implication level
Restrictive assumptions
In equality in income distribution (w & r changes)
This theory have more important in UDCs

12. CRITICISMS
Critisized by Metzler, Lancaster, Bhagwati
Metzler – The argument of this theorem that, TOT of tariff
imposing country remain unchanged is wrong. And found that
imposition of tariff will improve TOT to an extent.
According to Lerner Paradox, the imposition of tariff reduces the
DD for the imported goods . This is also against the Stolper
Samuelson Theorem.
Restrictive assumptions
!

13. References
Dominic Salvatore - International Economics
Trade and Finance (11th Edition)
ML. Jhingan - International economics (6th)
Internet
• Wikipedia
• http://vte.du.ac.in

14. Neal Creative | click & Learn moreNeal Creative ©
THANK YOU
ashiqpm2s@gmail.com