Ohlin's Modern Theory Vs Classical Ricardian Theory

Comparison - H.O Theory Vs Ricardian Theory ↓

The advantage or superiority of Ohlin's Modern Theory over the Ricardian Classical Theory of international trade gets highlighted from the following important points of comparison.

1. No difference among internal and international trade

According to the Classical economists, there is a need for a separate theory of international trade because of the differences between internal and international trade.

But according to Ohlin, there is no need for a separate theory of international trade, as fundamental principle of both is same.

2. More variables

As against Ricardian Theory which is based on two countries, two commodities and one factor, Ohlin's Modern theory incorporates two countries two commodities and two factors.

3. Comparative cost theory

According to the classical theory, the principle of comparative costs is a special feature of international trade.

According to Ohlin, the principle of comparative cost is applicable to all trade; whether internal or international.

4. Cost difference is expressed in terms of money

Superiority of H.O. theory lies in the fact that it calculates the cost differences in terms of money. Ricardo explains the difference in terms of labour theory of value of which is full of defects and impracticable. Trade which involves exchange of goods and services has been carried in terms of money. H.O. theory renders the cause of the trade easy to understand.

5. Supply of factors of production considered

The main cause of the international trade is the difference in factor supplies between the countries. Each country differs in factor endowments i.e. in their abundance or scarcity. Difference in supply, given the demand, brings the difference in cost of factor and finally, the difference in commodity prices. In Ricardian theory, difference in factor (labour) efficiency is recognized but difference in factor supply is ignored. H.O. theory, therefore provides a better explanation of price difference of factors through the difference is their supplies.

6. Contribution to positive economies

Ricardian theory which no doubt explains the reason for internal trade is more concerned with the benefits of trade. For classical economists, the welfare aspect of trade is more important. Ohlin has adapted a positive approach in explaining the cause of international trade. His main concern was to find out the cause of trade and not so much of its welfare aspect. Therefore, it is pointed out that Ohlin's analysis has contributed to positive economic analysis.

Briefly Compare - Ricardian Theory Vs HO Theory ↓

Conclusion - Ohlin's Theory Vs Ricardian Theory ↓

In the classical analysis, difference in the cost ratios between countries are due to the difference in the skill and efficiency of labour. It implies that there will be no trade in future if the two countries have mastered each other's technique and labour becomes equally efficient in both.

But Ohlin's theory asserts that trade will never end even if knowledge travels freely between the countries and the best techniques of production are always known to both countries. This is because, the modern theory states that the relative differences in factor endowments are the relative causes for the differences in the prices of commodities.

Thus the modern theory is an improvement over the classical theory.