Linder Hypothesis

AAA

DEFINITION of 'Linder Hypothesis'

An economic hypothesis that posits countries with similar per capita income will consume similar quality products, and that this should lead to them trading with each other. The Linder hypothesis suggests countries will specialize in the production of certain high quality goods, and will trade these goods with countries that demand these goods.

The theory was proposed by Staffan Linder in 1961.

INVESTOPEDIA EXPLAINS 'Linder Hypothesis'

Linder proposed his hypothesis in attempt to address problems with the Heckscher-Olin theory, which suggests that countries export goods that use their factors of production the most intensely. Because the production of capital-intensive goods is associated with higher income levels compared to labor-intensive goods, this means that countries with dissimilar incomes should trade with each other. The Linder hypothesis suggests the opposite.         

The Linder hypothesis works off the assumption that countries with similar income levels produce and consume similar quality goods and services. Research has shown that both export prices and demand are strongly correlated with income, specifically for the same quality of goods, though income is used as an approximation for demand. In this vein, countries with high incomes likely consume more high quality products.

The hypothesis focuses on high quality goods because the production of those goods are more likely to be capital-intensive. For example, while many countries produce automobiles, not all countries have healthy export markets for these products. Japan, Europe, and the United States actively trade automobiles.

Despite anecdotal evidence suggesting that the Linder hypothesis might be accurate, testing the hypothesis empirically has not resulted in definitive results. 

RELATED TERMS
  1. Capitalism

    A system of economics based on the private ownership of capital ...
  2. Export

    A function of international trade whereby goods produced in one ...
  3. Net Exports

    The value of a country's total exports minus the value of its ...
  4. Tianjin, China

    A definition of Tianjin, China.
  5. Economic Justice

    Economic justice is a component of social justice. It's a set ...
  6. Hong Kong SAR, China

    Hong Kong is a financial and business center in China.
Related Articles
  1. What Is International Trade?
    Personal Finance

    What Is International Trade?

  2. What is Globalization?
    Investing

    What is Globalization?

  3. How a Monopoly Works
    Economics

    How a Monopoly Works

  4. Ever Wanted to Own International Stocks? ...
    Economics

    Ever Wanted to Own International Stocks? ...

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center