Heckscher-Ohlin Model

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  • Post last modified:January 13, 2024
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The Heckscher-Ohlin Model, also known as the Factor Proportions Theory, is an economic theory that explains patterns of international trade based on the relative abundance of factors of production. It was developed by Swedish economists Eli Heckscher and Bertil Ohlin in the early 20th century. The model builds on the comparative advantage theory developed by David Ricardo but introduces the idea that countries differ in terms of their endowments of factors of production.

Key components of the Heckscher-Ohlin Model include:

1. **Factors of Production:**
– The model considers two primary factors of production: capital and labor. These factors are assumed to be mobile within a country but immobile across countries in the short run.
– Capital is defined as physical capital, such as machinery and equipment, while labor refers to human labor.

2. **Factor Endowments:**
– Countries are assumed to differ in their factor endowments. Some countries are considered capital-abundant, meaning they have a relatively high level of capital per worker. Others are considered labor-abundant, with a relatively high level of labor per unit of capital.

3. **Production Technologies:**
– The model assumes that countries have access to the same production technologies but may differ in the relative intensity with which they use capital and labor in production.

4. **Production Possibility Frontier (PPF):**
– The PPF represents the various combinations of two goods that a country can produce efficiently given its factor endowments and production technologies.

5. **Comparative Advantage:**
– Unlike Ricardo’s comparative advantage theory, which is based on differences in labor productivity, the Heckscher-Ohlin Model suggests that countries will specialize in producing goods that intensively use the factor of production that is relatively abundant in their economy.

6. **Trade Patterns:**
– According to the Heckscher-Ohlin Model, countries will export goods that are intensive in their abundant factor of production and import goods that are intensive in their scarce factor. This is known as factor intensity reversal in trade.

7. **Factor Price Equalization:**
– Over time, international trade is expected to lead to the equalization of factor prices (wages and returns on capital) across countries. This occurs due to changes in the relative demand for factors resulting from trade.

8. **Leontief Paradox:**
– The Leontief Paradox, named after Wassily Leontief, raised questions about the applicability of the Heckscher-Ohlin Model. Leontief found that the United States, a capital-abundant country, was exporting labor-intensive goods and importing capital-intensive goods, seemingly contradicting the predictions of the model.

While the Heckscher-Ohlin Model provides insights into the determinants of comparative advantage and trade patterns, it has limitations and simplifications. In reality, factors of production are not perfectly immobile, and countries may have variations in production technologies, market imperfections, and other factors that the model does not consider. Despite its limitations, the Heckscher-Ohlin Model has played a significant role in shaping international trade theory and policy discussions.