Linder hypothesis
Encyclopedia
The Linder hypothesis is a economics conjecture about international trade
patterns: The more similar the demand
structures of countries, the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowment
s (relying on specialization
to create a comparative advantage
in the production of differentiated
goods between the two nations).
Staffan Burenstam Linder
in 1961 as a possible resolution to the Leontief paradox
, which questioned the empirical validity of the Heckscher-Ohlin theory (H-O). H-O predicts that patterns of international trade
will be determined by the relative factor-endowments of different nations. Those with relatively high levels of capital
in relation to labor would be expected to produce capital-intensive goods while those with an abundance of labor relative to (immobile) capital would be expected to produce labor intensive goods. H-O and other theories of factor-endowment based trade had dominated the field of international economics
until Leontief
performed a study empirically rejecting H-O. In fact, Leontief found that the United States (then the most capital abundant nation) exported primarily labor-intensive goods. Linder proposed an alternative theory of trade that was consistent with Leontief's findings. The Linder hypothesis presents a demand based theory of trade in contrast to the usual supply
based theories involving factor endowments. Linder hypothesized that nations with similar demands would develop similar industries. These nations would then trade with each other in similar, but differentiated goods.
: it is convenient to assume that the closer are the income levels per consumer the closer are the consumer preferences. (That is, the proportionate demand for each good becomes more similar, for example following Engel's law
on food and non-food spending.)
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
patterns: The more similar the demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
structures of countries, the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowment
Factor endowment
In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all...
s (relying on specialization
Departmentalization
Departmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....
to create a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
in the production of differentiated
Product differentiation
In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings...
goods between the two nations).
Development of the theory
The hypothesis was proposed by economistEconomist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
Staffan Burenstam Linder
Staffan Burenstam Linder
Hans Martin Staffan Burenstam Linder was a Swedish economist and conservative politician. He was Swedish Minister for Trade from 1976–78 and from 1979-81....
in 1961 as a possible resolution to the Leontief paradox
Leontief paradox
Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital/labor ratio in exports than in imports....
, which questioned the empirical validity of the Heckscher-Ohlin theory (H-O). H-O predicts that patterns of international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
will be determined by the relative factor-endowments of different nations. Those with relatively high levels of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
in relation to labor would be expected to produce capital-intensive goods while those with an abundance of labor relative to (immobile) capital would be expected to produce labor intensive goods. H-O and other theories of factor-endowment based trade had dominated the field of international economics
International economics
International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them...
until Leontief
Wassily Leontief
Wassily Wassilyovich Leontief , was a Russian-American economist notable for his research on how changes in one economic sector may have an effect on other sectors. Leontief won the Nobel Committee's Nobel Memorial Prize in Economic Sciences in 1973, and three of his doctoral students have also...
performed a study empirically rejecting H-O. In fact, Leontief found that the United States (then the most capital abundant nation) exported primarily labor-intensive goods. Linder proposed an alternative theory of trade that was consistent with Leontief's findings. The Linder hypothesis presents a demand based theory of trade in contrast to the usual supply
Supply (economics)
In economics, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.In economics the...
based theories involving factor endowments. Linder hypothesized that nations with similar demands would develop similar industries. These nations would then trade with each other in similar, but differentiated goods.
Empirical tests
Examinations of the Linder hypothesis have observed a "Linder effect" consistent with the hypothesis. Econometric tests of the hypothesis usually proxy the demand structure in a country from its per capita incomePer capita income
Per capita income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate and dividing it by the total population...
: it is convenient to assume that the closer are the income levels per consumer the closer are the consumer preferences. (That is, the proportionate demand for each good becomes more similar, for example following Engel's law
Engel's law
Engel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
on food and non-food spending.)