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. Net Exports

    The value of a country's total exports minus the value of its ...
  3. Export

    A function of international trade whereby goods produced in one ...
  4. Peer-to-Peer (P2P) Service

    A Peer-to-Peer, or P2P, Service is a decentralized platform whereby ...
  5. Tianjin, China

    A definition of Tianjin, China.
  6. Economic Justice

    Economic justice is a component of social justice. It's a set ...
Related Articles
  1. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. Credit & Loans

    When is it necessary to get a letter of credit?

    Capitalize on assets and negate risks by using a letter of credit. Letters of credit are often requested for buying, selling or trading.
  3. Fundamental Analysis

    Can entities other than banks issue letters of credit?

    Obtaining a letter of credit from a non-bank is legally acceptable according to the ICC, but companies tend to prefer to receive them from banks.
  4. Economics

    Can scarcity and surplus coexist together?

    Can surplus and scarcity exist at the same time? Many examples of redistributing wealth and corporate welfare take advantage of this phenomenon.
  5. Investing Basics

    What is the difference between macroeconomics and finance?

    Dive into the world of economics by learning the key differences between macroeconomics and finance. These ideas help investors make good choices.
  6. Economics

    Why is Keynesian economics sometimes called demand-side economics?

    Learn why Keynesian economics is sometimes called demand-side economics, and find out how government spending increases aggregate demand and encourages growth.
  7. Economics

    How does macroeconomics explain "stagflation"?

    Learn about stagflation: a macroeconomic term used to describe economic turmoil. It is a time of serious inflation, slow economic growth and high unemployment.
  8. Fundamental Analysis

    What's the difference between r-squared and adjusted r-squared?

    Learn how R-squared and adjusted R-squared values differ, how they are calculated, the relationship between them and how to use them to make accurate estimates.
  9. Personal Finance

    What is the difference between Keynesian economics and monetarist economics?

    Discover how the debate in macroeconomics between Keynesian economics and monetarist economics always comes down to proving which theory is better.
  10. Economics

    Do CIF charges affect the customs duties?

    Using CIF when buying goods from abroad does not necessarily help in saving any money. There are other charges to be paid, such as custom fees at the port.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center