the linder hypothesis- li wenwen

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THE LINDER HYPOTHESIS

Li Wenwen（ I34030）

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Review H-O Model

• Each country exports the commodity which uses its abundant factor intensively.

• This model suggest that the patterns of trade is largely a supply side phenomenon.

• Prediction: trade between developed countries and developing countries due to the difference in factor endowment.

• Observation: a large volume of trade exists between the developed countries, which have similar factor endowments. Contradict to H-O.

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Staffan Linder(1961): Swedish economist • Linder agreed that trade in primary products is determined by factor endowments. He argued against that differences in factor endowments are the major determinants of trade in manufactured products.

• Linder’s hypothesis, referred to as overlapping demand hypothesis or the preference similarity hypothesis.(Demand-side oriented)

• Counties generally produce goods for the domestic market and then export the surplus. Therefore, the countries that have an interest in acquiring this surplus would have demand patterns similar to those of the exporting country.

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Linder’s assertions

1. Manufactured good is created by an innovative entrepreneur in response to a perceived demand. The potential demand, rather than Factor endowments that triggers production.

2. An entrepreneur is most familiar with the home market. Hard to perceive what kind of new products will be successfully introduced into Foreign market.( cultural difference, language difference, geographically distance)

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Linder’s assertions

3. For a manufactured product that potentially exported from a country, which has a home demand for it. It will export to the country with a very similar demand patterns to the home country. Thus, the production of a range of manufactured goods is determined by domestic demand as much as by production considerations such as factor endowments.

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Linder’s assertion

4. The country with the most similar demand patterns for manufactured goods will tend to be those with similar per capita incomes.

Low K income tend to buy + simple products.

High K income buy + sophisticated devices.

US and Canada

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Linder hypothesis

Conclusion• (Trade pattern) Predictions about with specific products each country might export are difficult to make, because such exports depend on the history of entrepreneurial activity in each market.

• However, international patterns of income and demand determine the extent of trade in manufactured goods. In particular, it is possible to export goods for which there is a strong demand.

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