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 goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...

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 alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision the ...

and

factor endowment A factor endowment, in economics, is commonly understood to be the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources ''Resource'' refe ...

s (relying on specialization to create a

comparative advantage Comparative advantage in an economic model is the advantage over others in producing a particular Goods (economics), good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior t ...

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 sciences, 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 ...

Staffan Burenstam Linder in 1961 as a possible resolution to the

Leontief paradox In economics, the Leontief's paradox is that a country with a higher capital per worker has a ''lower'' capital/labor ratio in exports than in imports. This econometric finding was the result of Wassily W. Leontief's attempt to test the Hecksch ...

, 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 Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...

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 an ...

until

Leontief Wassily Wassilyevich Leontief (; August 5, 1905 – February 5, 1999) was a Soviet-American economist known for his research on input–output analysis and how changes in one economic sector may affect other sectors. Leontief won the Nobel Memo ...

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 or supplies may refer to: *The amount of a resource that is available **Supply (economics), the amount of a product which is available to customers **Materiel, the goods and equipment for a military unit to fulfill its mission *Supply, as ...

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 Econometrics is an application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics", '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8� ...

tests of the hypothesis usually proxy the demand structure in a country from its

per capita income Per capita income (PCI) or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. In many countries, per capita income is determined using regular population surveys, such ...

: 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 is an economic relationship proposed by the statistician Ernst Engel in 1857. It suggests that as family income increases, the percentage spent on food decreases, even though the total amount of food expenditure increases. Expendit ...

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