Question

9. Is the Heckscher and Ohlin theory supported by Krugman’s New Trade Theory?

Answer 1

No, the new trade theory propounded by Paul Krugman in 1980 is not supported by Heckscher-Ohlin(H-O) trade theory. The H-O theory works on the factor-proportions theory that is comparative advantage among countries are determined by the factor endowments and factor intensities of production. The Krugman new trade theory incorporated intra-industry trade. Under this:

• a country can export and import the same good like for example a country can export and import automobiles.
• The same product can be sold in the different market with different advertisement strategy.
• Krugman pointed out that with trade a country can lose or can gain.
• H-O model never focused on the structure of the market. Krugman theory differentiates between the market that is the market can be competitive, monopoly or oligopoly with product differentiation.