Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

A
D
PPF
C
B
Shoes/Year
4mil
100mil
E
A
D
PPF
C
B
Shoes/Year
4mil
100mil
E
F
 
Figure 12.4 
What about point F? Can Appleoplios produce at point F?
Not at this time. They do not have enough resources to produce at 
this point. Would the country like to produce at point F? Sure they 
would, but how do they do it? They need to fine more resources or 
use technology to increase their production possibilities. Like all 
economies they want to produce more then the year before. They 
want to move their production possibilities curve out to point F and 
further the next year.
(A) 
(B) 

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A
D
PPF
C
B
Shoes/Year
4mil
100mil
E
F
Figure 12.5 
This is a new PPF that is achieved with the introduction of 
new resources or a new technology that can help the production 
process.
Check Your Progress: 
1. What do you understand by Opportunity cost? 
2. Write a note on Production Possibility Curve. 
 
 
 
 
 
 
 
 
 
 
12.4 THE HECKSCHER OHLIN MODEL 
 
Ricardian theory provided an explanation of trade on the 
basis of technological differences. One country needs more labour 
to produce one commodity compared to its trade partner and from 
there the inference came that the country in question had 
comparative disadvantage in that particular commodity. Heckscher 
Ohlin theorem starts from the other extreme. It assumes there is no 
international difference in production function. The same 
commodity is produced by using the same labour capital ratio and 

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yet trade takes place. So the theory tries to put forward an 
alternative basis of trade origin. 
Factor endowment model was developed by Heckscher in 
the year 1919. The paper was written in Swedish and it took about 
30 years for it to be translated in English. His student Ohlin also did 
research on the same topic in 1939.