Introduction

Abstract

The HO theory explains international trade only by differences in the countries’ relative factor endowments. It is based on a number of very strong assumptions. On the production side, it assumes identical technology across countries. On the consumption side, it assumes identical and homothetic preferences. In addition, it assumes perfect competition in the goods and factor markets, perfectly mobile production factors across sectors within countries, but completely immobile factors across countries.

“Theories are neither true nor false. Theories are sometimes useful and sometimes not so useful” (Edward Learner, 1995)