How Does Demand Reversal Invalidates the Theory

In this case, represented in fgure 1. 1 we have a situation of what is called demand reversal. Here not only the two biases-consumption and production re in the same direction but also the consumption bias more than offsets the production bias. Consumption point D lies to the left of production point A in country A and in country B the consumption point G lies to the right of production point B. When such a demand reversal takes place, the capital surplus country would export labour intensive goods.

The HECKSCHER OHLIN theory would then be invalidated by the demand reversal Critical evaluation of the HECKSCHER OHLIN theorem In the area of pure theory of international trade, the HECKSCHER OHLIN model occupies a very prestigious position. The very fact that many known Economists like Leontief, Walters, Minhas and others have tried to test the empirical validity of the HECKSCHER OHLIN theorem using econometric models, stands as a testimony of the prestige of the model.

The HECKSCHER OHLIN theorem has been criticised mainly along the following lines: the factor intensity reversal, Leontief and paradox and demand reversal argument Factor intensity argument The HECKSCHER OHLIN theorem was based on the assumption that the production functions are different for different goods but they are identical for each good in two ountries.

This, in other words means that one good is capital intensive and the other good is labour intensive, but the same good which is capital intensive in one country, must be capital intensive in the other country also and the labour intensive good remains labour intensive in both the countries. This assumption is guaranteed when both the two production isoquants for capital intensive and labour intensive cut each other only once but not more than once in diagram 1 this is shown to happen at point Q.