This essay will compare the New Trade theory (by Paul Krugman) and the Hechscher-Ohlin theory of international trade. Krugman (2018) argues that Hechscher-Ohlin’s theory is the fundamental theory of comparative advantage, stating that countries with a relative abundance of capital can export more capital-intensive goods and import labor-intensive goods. In contrast, countries with a relative abundance of labor can export labor-intensive goods and import capital-intensive goods. The Hechscher-Ohlin builds on the idea that countries have different factor endowments, such as land, capital and labor. Therefore, it predicts that countries specialize in producing goods that use their abundance factors of production and trade with other countries that use their scarce factors of production.

Hechscher-Ohlin often explains the relationship between resource endowment and international trade patterns (Krugman 2018). Suppose a country has an abundance of capital relative to labor intensive. In that case, it will have a comparative advantage in producing capital-intensive goods such as computers, machinery and aerospace parts, and a country with labor abundance relative to capital can have a comparative advantage in producing labor-intensive goods such as textiles, carpets and clothing (Krugman 2018). In addition, the Hechscher-Ohlin has been analyzed by economists, such as Wassily Leontief, who discovered that the United States is relatively well-endowed with capital-intensive; however, it tends to export labor-intensive goods and import capital-intensive goods.

On the other hand, the New Trade theory developed in the late 1970s and 1980s by economist Paul Krugman suggests that economies of scale and product differentiation can lead to trade equality without comparative advantage (Bernard and Jensen 2007). Also, his theory is a collection of economic models in international trade theories focusing on increasing returns to scale. Unlike the Hechscher-Ohlin and Ricardian model theories that depend on comparative advantage and factor endowment differences to explain international trade, the New Trade theory assumes constant returns to scale. It usually indicates that increasing return to scale can determine international trade patterns between two countries without differences in factors of production (Bernard & Jensen 2007).

The New Trade theory argues that economies of scale can lead to the concentration of production in a few countries. Then, they will export their goods to other countries, indicating that it causes trade domination by a few countries and, more significantly, promotes complications for competition policies as Neary (2009) argued in his summary of Krugman’s landmark 1979 paper that provides a cohesive general-equilibrium analysis of trade which encourages specialization and large-scale production that leads to a lower price. Accordingly, the New Trade theory explains the existence of intra-industry trade and the role of economies of scale in international trade patterns.

Evaluate Hechscher-Ohlin and New Trade Theories

Duignan Brian (2020) summarized that the Hechscher-Ohlin theory assumes that countries have different endowments, such as land, labor and capital. At the same time, it predicts that countries specialize in producing goods that use their abundance factors and trade with other countries for goods that use their scarce factors of production. Also, the empirical evidence study suggests that the Hechscher-Ohlin theory sometimes conflicts with the actual patterns of international trade. The critics of the Hechscher-Ohlin theory often argue that it does not consider technological differences between countries.

Pettinger Tejvan (2017) explains that the New Trade theory proposes the assumption of constant return to scale, indicating that increasing returns to scale can promote trade flows between countries without differences in factors endowments. It predicts that the New Trade theory suggests that economies of scale can lead to more concentration of production in a few countries. An empirical study shows that it helps explain why some firms are concentrated in some countries, which concerns dominant entrants and economies of scale in the market (Pettinger 2017). More broadly, critics argue that the theory does not account for technological differences and promotes monopolistic strategies that lead to limited competition and unfair practices toward early entrants.

From the Biblical worldview, Hechscher-Ohlin’s theory delves into the importance of work in which countries with a relative abundance of capital can export more capital-intensive goods that use their abundance factors of production. This paragraph aligns with the Biblical worldview as the Bible talks about the value of labor and the need for fair trade practice. The Bible addresses the principles of stewardship, justice and mutual benefit, which are the idea of using resources efficiently with the comparative advantage. Arnott, D. & Saydometov, S. (2021) explained in their book, ‘The Biblical Economic Policy,’ where they integrated the biblical worldview into the economic system.

In the meantime, trade can promote peaceful relations and cooperation between nations, aligning with the principle of peace and mutual respect in the Bible. In addition, they have emphasized that “a free market is the most accurate and caring system of economics that can express and be centered heavily on loving your neighbor as yourself, indicating that producers use their private property to provide services for their neighbor.” The ability of producers to provide their private property is the same as the Hechscher-Ohlin theory, which emphasizes that a country specializes in producing goods that use their abundance factors of production and trade with other countries.

Generally, the Hechscher-Ohlin and the New Trade theories are common in international trade patterns. Hechscher-Ohin theory argues that a country with a relative abundance of capital can specialize in producing capital-intensive goods and export capital-intensive goods that use their abundance factors of production and import labor-intensive goods, which, on the other hand, states the same similar situation for a country with a relative abundance of labor can also specialize in producing labor-intensive goods and export labor-intensive goods that use their abundance factors of production by trading with each other in international trade patterns.

The New Trade theory emphasizes that economies of scale and product differentiation can make trade equalization without comparative advantage, and this theory often focuses on the combination of economic models in international trade patterns. The theory suggests that increasing return to scale and intra-industry can provide a concentration of more companies, resulting in limited competition for early entrants. An intra-industry trade increases a country’s export and import of similar goods and services.

References

Krugman, P., Obstfeld, M. & Melitz, M. (2018). International trade: theory and policy (11th ed.). Pearson. https://plus.pearson.com/courses/urn:xl-hed:course:7628489/products/JRCHCPFJGO1/pages/a841fbbb6b4dcae92d730bdf1a9d51f3c1e563423-id_toc14?locale=&key=271877128147379269142023.

Bernard, B., A. & Jensen, J., B. (2007). Firm in international trade. Journal of economic perspective. https://eds-s-ebscohost-com.ezproxy.ccu.edu/eds/pdfviewer/pdfviewer?vid=1&sid=2020f866-4ba0-4f2f-b11d-b5b48eadae30%40redis

Neary, P. J. (2009). Putting “New” into New Trade Theory: Paul Krugman’s Noble Memorial Prize in Economics. Scandinavian Journal of Economics. https://eds-s-ebscohost-com.ezproxy.ccu.edu/eds/detail/detail?vid=2&sid=bf78f2fd-e705-46d7-9ee9-be1d92825622%40redis&bdata=JnNpdGU9ZWRzLWxpdmU%3d#AN=edsjsr.40254862&db=edsjsr

Duignan, B. (2020). Hechscher-Ohlin Theory. Encyclopedia Britannica https://www.britannica.com/money/topic/Heckscher-Ohlin-theory

Pettinger, T. (2017). New Trade Theory. https://www.economicshelp.org/blog/6957/trade/new-trade-theory/

Arnott, D. & Saydometov, S. (2021). Biblical Economic Policy: A useful guide to a Christian Perspective on Economics. https://www.dbu.edu/news/2021/07/biblical-economic-policy-a-useful-guide-to-a-christian-perspective-on-economics.html