The Linder hypothesis is an economics conjecture about

international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significan ...

patterns: The more similar the

demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...

structures of countries, the more they will trade with one another. Further, international trade will still occur between two countries having identical

preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between wikt:alternative, alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are centra ...

and factor endowments (relying on

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to create a

comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Co ...

in the production of differentiated goods between the two nations).

Development of the theory

The hypothesis was proposed by

economist An economist is a professional and practitioner 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. Within this field there are ...

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

will be determined by the relative factor-endowments of different nations. Those with relatively high levels of capital in relation to

labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...

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 is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and ...

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.

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 income Per capita income (PCI) or total income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population. Per capita i ...

: 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.) Econometric test of the hypothesis has been difficult because countries with similar levels of per capita income are generally located close to each other geographically, and distance is a very important factor in explaining the intensity of trade between two countries. Generally, a Linder effect has been found to be more significant for trade in manufactures than for non-manufactures, and within manufactures the effect is more significant for trade in capital goods than in consumer goods and more significant for differentiated products than for standardized products.Robert C. Shelburne, A Ratio Test of Trade Intensity and Per-Capita Income Similarity, Weltwirtschaftliches Archiv, Volume 123, Heft 3 (Fall) 1987, pages 474-87.

References

Footnotes

{{reflist International trade theory

Development of the theory

Empirical tests

See also

References

Footnotes