Question

Which of the following is not the correct assumption of the Heckser-Ohlin theory of international trade?

• A. All resources are fully employed in both nations.
• B. Trade between the two countries is balanced.
• C. Both commodities are produced under constant returns to scale in both countries.
• D. Demand preferences are not identical in both countries.

Hint:

Heckscher-Ohlin theory assumes differences in factor endowments between countries, not necessarily balanced trade.

Answer 1

The Correct Option is B

Step 1: Understanding the Heckser-Ohlin theory.
The Heckscher-Ohlin theory of international trade assumes that countries trade based on their relative abundance of factors of production (land, labor, and capital). It assumes fully employed resources, constant returns to scale in production, and differences in factor endowments across countries.

Step 2: Analysis of options.
- (A) All resources are fully employed in both nations: This is correct. The theory assumes full employment of resources in both countries.
- (B) Trade between the two countries is balanced: This is incorrect. The theory does not assume that trade must be balanced, as countries may export and import different quantities based on their comparative advantage.
- (C) Both commodities are produced under constant returns to scale in both countries: This is correct. Constant returns to scale is one of the assumptions of the theory.
- (D) Demand preferences are not identical in both countries: This is correct. The theory assumes that demand preferences differ across countries, leading to international trade.

Step 3: Conclusion.
The incorrect assumption is (B), as the theory does not require trade between the two countries to be balanced.