Learning Objectives Compare and contrast different trade theories. Determine which international trade theory is most relevant today and how it continues to evolve.
Linder, a Swedish economist attempted to explain the pattern of international trade on the basis of demand structure. This theory was propounded by him in According to Linder, a manufactured product will not generally be exported until after there is demand for it within the home country.
The products are, in fact, produced basically to meet the domestic requirements. It is only subsequently that the product is exported to other countries. The theory maintains that the countries having identical levels of income have similar demand structure and propensity to trade with other countries.
This theory is based upon the assumptions given below: Linder, the trade in primary products is governed essentially by the relative abundance of natural resources. Trade in manufactured products, on the other hand, is governed by a complex of factors such as economies of scale, managerial skills, availability of capital and skilled labour, technological excellence etc.
Linder has not dwelt upon the composition of trade between the two countries. His theory is connected essentially with the volume of trade in manufactured goods between them.
|Chapter 2 - International Trade + Investment Flashcards | Easy Notecards||The various traditional connoisseurs of trade theory belonging to different schools of thought such as those of Adam Smith, David Ricardo and Bertil Ohlin would at the end of the day whole-heartedly support a verdict, i. Leaving aside the assumptions specific to each model, the fundamental assumptions of the orthodox theory are:|
|Because the production of capital-intensive goods is associated with higher income levels compared to labor-intensive goods, this means that countries with dissimilar incomes should trade with each other.|
|Linder Hypothesis Definition | Investopedia||In this essay we will discuss about International Trade. After reading this essay you will learn about:|
The major emphasis in this theory has been placed upon the prime condition that the countries will trade in those manufactured goods for which domestic demand is present. It happens because foreign trade has always been regarded as an extension of domestic trade.
Moreover, the possibilities of exports arise an account of the domestic demand. Since the foreign market is viewed as more risky than the home market, it is often considered not prudent to depend exclusively upon foreign market.
A large domestic market induces an expansion in output ensuring the economies of scale and consequent reduction in costs. In these conditions, it is very opportune for the country to enter the foreign market.
A country, in the opinion of Linder, will export its products largely to such countries, as have similar patterns of demand and levels of income. As a result of preference similarity, the country will have overlapping demands.
According to Linder, just as within a country consumers in high income groups demand the products of high quality and these in low income group demand products of low quality, in the international trade also, the low income country, on an average, will be inclined to demand products of low quality and high income countries will be inclined to demand high quality products.
This, however, does not mean that low quality products will not be demanded by high-income countries and vice-versa. In view of disparities in income distribution in all the societies, some measure of preference similarity and overlapping of demand patterns cannot be ruled out. The different varieties of manufactured products are produced by the different countries for meeting the domestic demand and same products are exported to the foreign countries.
The preference similarity or overlapping demand pattern can be discussed through Fig. Products are measured along the vertical scale.
The line OP starting from origin expresses the relation between products and per capita incomes.
Country A has higher per capita income Y1 and it demands the higher quality product Q1. Country B has lower per capita income Y0 and it demands the lower quantity product Q0. Since income distribution is unequal in the two countries, each one of them has demand for both the products. Let us suppose income distribution in country A leads to the demand for two products taken together in the range of AN.
The range of demand for products in country B is BC. The existence of overlapping demand creates the possibility of trade between them. There will be export of higher quality product Q1 from country A to meet the demand of high-income group in country B.
Similarly the latter will export lower quality product Q0 to meet the demand for it from lower income group of people in country A. The larger and smaller magnitude of demand overlap will determine correspondingly the larger or smaller potential and actual volume of trade and the levels of income in the two trading countries.
The H-O theory had specified that trade would take place between the trading countries, if their factor proportions were different. Linder found support for his hypothesis in Sweden but the attempts to confirm it with the evidence from other countries have not met with success.
There is great demand for expensive motor cars in the oil-rich countries, but they have not undertaken the production of this commodity either for meeting domestic consumption or for exports.Linder's theory of over-lapping demand: Staffan Linder () proposed an alternative theory of trade that was consistent with Leontief's paradox.
The Linder hypothesis presents a demand based theory of trade in contrast to the supply based theories involving international differences in technologies or factor endowments.
Linder Hypothesis is an economic hypothesis that posits countries with similar per capita income will consume similar quality products, and that this should lead to them trading with each other.
Overlapping Demand Is Different From The Other Trade Theories CHAPTER 5: INTERNATIONAL TRADE THEORY QUICKNOTES IN GLOBAL INTERNATIONAL TRADE Condensed by: Group 2 7 THEORIES OF INTERNATIONAL TRADE: 1. Mercantilism 2. Absolute Advantage 3. Comparative Advantage 4.
Heckscher-Ohlin Theory 5. International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities.
International trade is then the concept of this exchange between people or entities in two different countries. Inability of the county based theories to explain and predict the existence and growth of intra-industry trade 3.
Failure of Leontief and other researchers to empirically validate Heckscher-Ohlin theory. Oct 03, · 3) Overlapping Demand Theory: Unlike supply driven trade theories and models discussed so far in this section, Stefan Linder () presented overlapping demand theory by focusing demand driven aspects of manufacturing products in international trade.
According Linder’s theory, in each country industries produce goods designed to please the taste of the domestic consumers.