MODERN THEORY GENERAL EQUILIBRIUM THEORY

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MODERN THEORY  GENERAL EQUILIBRIUM THEORY

111c modern theory of international trade i all exton I1n of thc general equilibrium theory Ill’ value. Thrs analysis known a the ‘functor-portions-analysis issis ha, been given hy Bernt Ohlin alld il has replaced the traditional comparative Lt”t theory. We know that the pncc or a is determined hy the demand for and supply of it, i.c., thc preferences and incomes of  011 the one hand, and production possibilities. on the other. At the point of equilibrium the demand and supply will be equal to each other and also the pncc of the Commodity equals its cost of production per unit. The emt of production i~composed or the prices paid for the factors required for thc production of the commodity. These factor p ices determine the consumers’ incomes from which ari\(‘s the demand for the commodity. Ohlin thus points out the mutual intenlepcudcncc of pi ices of thc couunoditic«, the prices of the required factors. the demand tor the commodity as wcll as thc demand for and supply or thc factors, Just as individuals sCialisill xotuc ccunomic artivity or activities ill which thl’) have coinpar. uivc advantage on the ha\is of their talents and aptitudes. similarly countries spccialivc in the pnxluclion of certain commodities in Which they havc COIllparativc advantage on the basis of Iuctor endowments. Just ns differences in individual capabilities is the cause of exchange between individuals, similarly differcncc in l.ictur prices is the cause or inter-regional or uucrn.uional trade. The analysi» which is applicable to ,I ,illgil’ nuu kct in a region \11’a country. Bcrtil Ohlin extends to the noninfectious “I’ values internationally or to exchange between diltcrcut regillns or count lies.

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MODERN THEORY GENERAL EQUILIBRIUM THEORY