Contemporary International Trade is no longer explained by Factor Essay

Contemporary International Trade is no longer explained by Factor Proportions Theory - Essay Example While some countries were naturally rich in capital resources, other had a huge population which gave rise to an abundance of labor. The nations were said to possess competitive advantage in the factors of production which was readily available in their economies. It followed from common logic that countries having natural endowments of a specific factor would always engage in a production technology intensive in that particular factor. Therefore, a capital rich economy was always considered to engage in a capital-intensive technology for the production of commodities. The same case would apply for the labor abundant economy as well. However, in that case the countries ended up producing goods produced by only one factor-intensive type of production method. Therefore, they needed to engage in mutually beneficial exchange of goods to gain access to other types of products as well. However, the contemporary trends in international trade sometimes violate the tenets of the Factor Propor tions Theory. Homogenous countries being naturally endowed with the same pattern of factor endowments have been increasingly observed to have engaged in trading with each other. In such cases, only Factor Proportions Theory cannot explain the current trends in global trade. Consequently, specialists in trade have sought to explain the contemporary trading practices with the help of a number of alternative theories. This paper has attempted to evaluate these alternative theories and investigate their explanations about modern international trade. The Classical Theory of International Trade was the first acceptable explanation of international trading practices. About 150 years after this,the Swedish economists Eli Heckscher and Bertail Ohlin had proposed the factor proportions theory or the factor endowment theory of international trade. This theory is based on the concept of the comparative advantage (or disadvantage) of a country based on its relative abundance (or scarcity) of the factors of productionavailable within its economy.The factor proportions theory advocates that a country should be engaged in the production and export of commodities that is primarily based on a factor of production which is abundantly present in its economy.Considering the framework of a two-country, two-factor and two-commodity framework of international trade, the theory states that the different nations are endowed with different proportions of the factors of production like capital and labor. Some nations have an abundance of capital resources but are short on available labor. Such a country would be capable of producing commodities using a capital intensive mode of production at acomparatively low cost. Similarly, countries having an abundance of labor resources would produce labor intensive goods at a low cost. The first country would then be inclined to export its capital intensive goods to the second nation and import labor intensive commodities from the latter. Through i nternational trade, both countries would gain access to both the types of commodities at the least cost. However, the present international scenario presents a different picture of international trade. Current world trade is dominated by the exchange of goods between homogenous countries which are found to have an advantage in the same factor (factors) of production. In such cases, trading involves commodities which are generated by a similar