Relative prices of all commodities will be identical in the two regions, if:
1. The conditions determining the demand for goods, i.e., wants and preference of consumers as well as their income? are identical in both the regions;
2. The factors of production are available in the same proportion in both the regions; and
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3. Any differences in the supply of factors are balanced by an exactly compensating difference in demand conditions.
These three conditions may not hold good and there may be differences in relative factor of supply as well as demand.
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As a result, there will be differences in the relative factor prices and hence, in relative commodity prices.
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Basically, therefore, the difference in the relative ‘scarcities of productive factors” the supply of factors of production in relation to demand is a necessary condition for the opening of trade between regions.
Of the three conditions mentioned above, it is practically inconceivable to imagine that the first and the third will exist at any time; that is, the demand for goods in the two regions will be identical and that it will exactly off-set the differences in the supply of factors of production. Ohlin concluded as follows:
(i) The immediate cause of inter-regional trade is the difference in commodity prices in the two regions.
(ii) Inequality of differences in commodity prices arise as a result of differences in the supply of productive factors in the two regions.
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Land is cheap in Australia while other factors are relatively dear. Consequently, commodities which require large quantities of land but very little of labour and capital; such as wheat, wool, meat, etc., are cheap in Australia.
In a country like England, on the other hand, capital is abundant while there is a great scarcity of land. Hence, those products which require plenty of capital are cheap in England.
Ohlin concluded, “Roughly speaking, abundant industrial agents are relatively cheap, scanty agents relatively dear in each region.
Commodities requiring for their production much of the former and little of the latter are exported in exchange for goods and call factors in the opposite proportions.
Thus, indirectly factors in abundant supply are exported and factors in scanty supply are imported.”