What is the Linder Hypothesis?

The Linder hypothesis was proposed by Staffan Linder. The theory states that the more similarity a country shares in terms of total income generated, the more similarity they share in the consumption of products by consuming the same quality products and even trading with one another.

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How is the Linder Hypothesis Used?

The Linder theory was proposed as a countermeasure to the Heckscher-Olin theory which emphasized that countries with varied or different incomes should trade with each other. The Heckscher-Olin theory states that when two countries produce two goods and use two factors of production such as labor and capital factors to produce these goods, each will export the good that makes the most use of the factor that is most surplus. Reasons due to the production of goods that demands more capital are as a result of higher income levels, unlike labor-intensive goods. The Linder hypothesis has been able to establish that countries with the same range of income demand, consume and produce a similar range of quality goods and services. Research has shown that income decides export prices and demand. As a result of this, countries with high incomes will demand and consume high-quality goods. Likewise, income is used to estimate demand. High-quality goods require a large amount of investment or money to produce. This is the main focus of the Linder hypothesis. A good example is the automobile export market which is basically between countries like Japan, Europe and the United States of America. The core statement of the Linder hypothesis is that countries with similar incomes will share similar demands and trade with each other, even develop similar industries. This is focussed on the demand-based theory rather than the common supply based trade theory.

Proving the Linder Hypothesis

Several unscientific observations have proven the Linder hypothesis to be of utmost relevance and accurate but testing the hypothesis has been difficult as a result of the geographical proximity between the countries sharing similar income. To explain a trade as being active or passive, geographical distance between the countries is a major factor to be considered, hence the reason for lack of test of the hypothesis. One of the shortcomings of the Linder hypothesis is the lack of a formal model for the theory, this has resulted in different studies testing the hypothesis in various ways and under differing conditions. Some studies have opposing views but lack substantial evidence. They have only provided figures for countries that actually trade, they do not input zero values for the dyads where trade could happen. The Linder hypothesis has been found to be useful in classifying trade in manufacturing manufactured products versus non-manufactured products. In manufactured products, the effect is basically for trade in capital goods than in consumer goods and also for products that are quite different than for products that share the same similarity in terms of standards.

Related Topics

• Trade Balance: Surplus and Deficit
• Mercantilism
• J Curve
• National Trade Data Bank
• Capital Account (Economics)
• Merchandise Trade Balance
• Current Account 
• Income Payments
• Unilateral Transfer
• Is it better to have a trade surplus or a trade deficit? 
• Export of Goods and Services and Percentage of GDP
• Heckscher-Ohlin Model 
• Linder Hypothesis
• The Balance of Trade as a Balance of Payments
• National Savings and Investment Identity
• Circular Flow of Money
• Financial Capital
• Supply and Demand Sides for Financial Capital? 
• Flow of Capital
• Domestic Saving and Investment Determine the Trade Balance
• National Savings Identity and Trade Deficits
• How the Business Cycle Affects Trade Balances
• Trade Balance or Trade Surplus
• Level of Trade
• Comparative Advantage
• Absolute Advantage
• Specialization and Gain from Trade
• Absolute Advantage in All Goods
• Production Possibilities Frontier and Comparative Advantage
• Comparative Advantage and Mutually Beneficial Trade
• Gain from Trade
• Opportunity Costs and International Trade
• Intra-Industry Trade
• Splitting Up the Value Chain
• How Economies of Scale Lead to Trading Advantages
• Protectionism
• Closed Economy
• Tariffs 
• Double Column Tariff
• Import Quotas
• Double Column Tariff
• Infant Industry Theory
• National Interest Argument
• Race to the Bottom
• Anti-Dumping Laws
• Dumping
• Trade War
• Race to the Bottom
• Non-Tariff Barriers
• Effects of Trade Barriers
• Who Is Benefited and Who is Harmed by Protectionism?
• Infant Industry Theory for Restricting Imports
• What is the Anti-Dumping Argument for Restricting Imports?

• Anti-Dumping Laws
• Dumping

• What is the Environmental Protection Argument for Restricting Imports?
• Race to the Bottom
• Unsafe Consumer Products Argument for Restricting Imports?
• National Interest Argument for Restricting Imports
• What is the WTO?
• What is the GATT?
• What are Free Trade Agreements?
• North American Free Trade Agreement
• Central European Free Trade Agreement
• General Agreement on Free Tariff and Trade (GATT)
• Common Market
• Common Market for Eastern and Southern Africa
• Central American Common Market
• Caribbean Community and Common Market
• What are Economic Unions?
• WTO
• International Monetary Fund
• World Economic Forum
• Inter-American Development Bank
• Davos World Economic Forum 
• Chamber of Commerce
• Jackson Hole Economic Symposium