UGC NET COMMERCE December 2018 Q89
- Option : D
- Explanation : Factor Proportions Theory
Almost after a century and a quarter of the classical version of the theory of international trade, two Swedish economists, Eli Heckscher and Bertil Ohlin, propounded a theory that is known as the factor endowment theory or the factor proportions theory. In fact, it was Eli Heckscher who mooted the notion of a country’s comparative advantage (disadvantage) based on relative abundance (scarcity) of factors of production. Later on, his student, Bertil Ohlin developed this notion of relative factor abundance into a theory of the pattern of international trade.
The theory explains that in a two-country, two-factor, and two-commodity framework different countries are endowed with varying proportions of different factors of production. Some countries have large populations and large labour resources. Others have abundance of capital but are short of labour resources. Thus, a country with a large labour force will be able to produce the goods at a lower cost using a labour intensive mode of production. Similarly, countries with a large supply of capital will specialise in goods that involve a capital intensive mode of production. The former will export its labour intensive goods to the latter and import capital intensive goods from the latter. After the trade, both the countries will have two types of goods at the least cost.
Factor endowment theory explains that a country should produce and export a commodity that primarily involves a factor of production abundantly available within the country.
