This document outlines the Linder Hypothesis, an alternative theory to the Heckscher-Ohlin (H-O) model of international trade. The Linder Hypothesis, proposed by Swedish economist Staffan Linder, argues that differences in domestic demand, rather than factor endowments, are the major drivers of trade in manufactured goods. Specifically, it asserts that countries will first produce goods for their domestic markets and then export surpluses to other countries with similar demand patterns and per capita incomes. The hypothesis concludes that while specific export predictions are difficult, international patterns of income and demand largely determine trade volumes in manufactured products between countries.

1. THE LINDER
HYPOTHESIS
Li Wenwen（I34030）
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2. Review H-O Model
• Each country exports the commodity which uses its
abundant factor intensively.
• This model suggest that the patterns of trade is
largely a supply side phenomenon.
• Prediction: trade between developed countries and
developing countries due to the difference in factor
endowment.
• Observation: a large volume of trade exists between
the developed countries, which have similar factor
endowments. Contradict to H-O.
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3. Staffan Linder(1961): Swedish economist
• Linder agreed that trade in primary products is
determined by factor endowments. He argued against
that differences in factor endowments are the major
determinants of trade in manufactured products.
• Linder’s hypothesis, referred to as overlapping
demand hypothesis or the preference similarity
hypothesis.(Demand-side oriented)
• Counties generally produce goods for the domestic
market and then export the surplus. Therefore, the
countries that have an interest in acquiring this surplus
would have demand patterns similar to those of the
exporting country.
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4. Linder’s assertions
1. Manufactured good is created by an innovative
entrepreneur in response to a perceived demand.
The potential demand, rather than Factor
endowments that triggers production.
2. An entrepreneur is most familiar with the home
market. Hard to perceive what kind of new
products will be successfully introduced into
Foreign market.( cultural difference, language
difference, geographically distance)
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5. Linder’s assertions
3. For a manufactured product that potentially
exported from a country, which has a home
demand for it. It will export to the country with a
very similar demand patterns to the home
country. Thus, the production of a range of
manufactured goods is determined by domestic
demand as much as by production
considerations such as factor endowments.
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6. Linder’s assertion
4. The country with the most similar demand
patterns for manufactured goods will tend to
be those with similar per capita incomes.
Low K income tend to buy + simple products.
High K income buy + sophisticated devices.
US and Canada
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7. Linder hypothesis
Conclusion
• (Trade pattern) Predictions about with specific
products each country might export are difficult to
make, because such exports depend on the history
of entrepreneurial activity in each market.
• However, international patterns of income and
demand determine the extent of trade in
manufactured goods. In particular, it is possible to
export goods for which there is a strong demand.
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