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.

BREAKING DOWN '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. Hypothesis Testing

    A process by which an analyst tests a statistical hypothesis. ...
  2. Null Hypothesis

    A type of hypothesis used in statistics that proposes that no ...
  3. Home Market Effect

    The notion that, when it is fiscally prudent, a company or industry ...
  4. P-Value

    The level of marginal significance within a statistical hypothesis ...
  5. Type II Error

    A statistical term used within the context of hypothesis testing ...
  6. Permanent Income Hypothesis

    A theory of consumer spending which states that people will spend ...
Related Articles
  1. Investing

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  2. Investing

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  3. Investing

    How Statistical Significance is Determined

    If something is statistically significant, it’s unlikely that it happened by chance.
  4. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  5. Investing

    Rising Prices: Inflation or Quality Improvements?

    Price indices are used to measure inflation, but qualitative improvements in products complicates attempts to isolate the true cause of rising prices.
  6. Insights

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
  7. Investing

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  8. Insights

    Explaining Income Per Capita

    Income per capita measures the amount of money that’s earned per person in a defined area.
  9. Investing

    Growth and Politics In Exports

    An export is a good or service that is shipped from one country to another for sale or trade.
RELATED FAQS
  1. What does a strong null hypothesis mean?

    Find out what null hypothesis is and why it is important to the scientific method. See how statisticians and economists use ... Read Answer >>
  2. Has the Efficient Market Hypothesis been proven correct or incorrect?

    Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
  3. What is the relationship between confidence inferrals and a null hypothesis?

    Learn about the relationship between confidence intervals and the null hypothesis in scientific research and empirical experimentation. Read Answer >>
  4. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  5. What are the primary assumptions of Efficient Market Hypothesis?

    Find out about the key assumptions behind the efficient market hypothesis (EMH), its implications for investing and whether ... Read Answer >>
  6. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center