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Short Essay on the Availability Doctrine of

International TradeNirav S

I. B. Kravis has developed the availability theory against the comparative cost theory as a plausible

explanation of international trade in certain cases. His argument is that country exports certain scarce

resources in the world because these are available with it. For instance Gulf countries export oil,because oil fields are deposited with them.

To explain the availability doctrine theoretically let us assume that there are four countries A, B, C

and D. Suppose two goods X and Fare to be produced. Labour and capital are needed for both these

goods. But, in the production function of X, greater use of land is necessary, while, for Y a high

order of technical know-how is required. Countries A, B and C possess this technical know-how.Countries B, C and D have land. That means country A can produce only Y, while D can produce

only X. Whereas, countries B and C are in a position to produce both goods: Z and Y.

In this example, the exports of countries B and C can be explained by the relative commodity price

differences as visualised in Ohlin's model or even in terms of the comparative cost differences.

But, the exports of countries A and B will be governed by the availability doctrine. It is obvious thatA can produce only Y, so it becomes its export. Similarly, D's export will be X.

In short, A exports 7to D and imports A!"from the latter is suitably explained by the availability

theory.

Sometimes specific consumer preference for a particular country's good available with it favours that

country in fetching a better terms of trade than its potential rivals. For example, Swiss watchesagainst Japanese watches.

However, the availability doctrine does not offer a sufficient explanation for international trade. It isnot a very deep-seated doctrine. It is neither comprehensive nor highly illuminating. It only servessome purpose in explaining the exports of certain commodities like oil, minerals, etc., by some

countries. But, a general pattern of world trade cannot be explained in terms of this theory.

Country Similarity Theory

C o u n t r y S i m i l a r i t y T h e o r y

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Swedish economist Staffan Burenstam Linder proposed the Country Similarity Theory in 1961 to

describe a pattern of international trade. Also referred to as the Linder hypothesis, the theory

states that countries with similar per capita incomes are most likely to engage in trade with oneanother. Linder also observed that countries with similar incomes are likely to share consumer

preferences. The theory has since been expanded to include otherareas of similarity,such as

level of development, savings habits, degree of technology and industrialization, language, andcommunication and transportation systems.

Linder presented his hypothesis in his PhD dissertation,An Essay on Trade and Transformation,

as a response toLeontiefs paradox.In 1951 while empirically testing the Hecksher-Ohlin

theorem, which states that a country will export products that use its abundant factor intensivelyand import goods that use its scarce factor, Wassily Leontief reached the conclusion that the

United States exports labor-intensive goods and imports capital-intensive goods. This is

paradoxical to since the U.S. is the most capital-abundant country in the world. Leontief

suggested that the paradox was caused by the greater efficiency of U.S. workers, but thisexplanation received little support among economists.

One of thechief assumptionsof Linders hypothesis is that consumers living in similar countries

will have similar tastes and want to buy the same goods and services. Linderobservedthat

manufacturers producing goods for the domestic market seek out countries with similar

economies and preferences whey they decide to expand to the export market. This is especiallytrue among developed countries, where a new product or a variation on an existing product

introduced in one country is likely to be found useful and desirable in similar counties. As a

result, high-income countries trade variations of the same goods among themselves.

The exchange of similar but differentiated products belonging to the same industry is referred to

as intra-industry trade. An example is automobile trade between the U.S., Europe and Japan. The

Country Similarity Theory suggests that intra-industry trade occurs when similar countries

import and export each others goods. Intra-industry trade is also characterized by a country both

importing and exporting products from the same industry. Standard industrial classificationssaythat intra-industry trade accounts for about 25% of world trade. For developed countries as a

group, intra-industry trade isover 60% of all trade. Some developed countries experience moreintra-industry trade than others, withas much as 77%of Frances trade falling intothis category.

In the decades following the development of Linders hypothesis,empirical studieshave been

conducted using pooled data from countries around the world. The results of these studies

support Country Similarity Theory. Since the 1990s, empirical data has strengthened the theorys

validity. This is most likely due to increased globalization.

Prior to the development of Country Similarity Theory and other intra-industry theories of

international trade, traditional theories such asMercantilismpointed to differences in supply and

demand conditions as a predicator of trade between two countries. Mercantilism, which

dominated economic thinking between 1500 and 1800, is based on the belief that there is a finiteamount of wealth in the world and that when one country has more, other countries have less.

Mercantilists encourage exports over imports and use the size of a countrys trade balance to

judge the success of its trade efforts. During the period when mercantilism was popular, nationsfrequently restricted imports in order to avoid a trade imbalance.

Instead of focusing upon the differences between trade partners, Linders intra-industry trade

theory emphasizes the similarities. His hypothesis is noteworthy and still attracts the interest of

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economists because it was one of the first theories to suggest that additional factors besides

supply and demand can influence trade.