Heckscher–Ohlin model

The Heckscher–Ohlin model (/hɛkʃr ʊˈliːn/, H–O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the resources of a trading region. The model essentially says that countries export the products which use their relatively abundant and cheap factors of production, and import the products which use the countries' relatively scarce factors.^[1]

Features of the model[edit]

Relative endowments of the factors of production (land, labor, and capital) determine a country's comparative advantage. Countries have comparative advantages in those goods for which the required factors of production are relatively abundant locally. This is because the profitability of goods is determined by input costs. Goods that require locally abundant inputs are cheaper to produce than those goods that require locally scarce inputs.

For example, a country where capital and land are abundant but labor is scarce has a comparative advantage in goods that require lots of capital and land, but little labor — such as grains. If capital and land are abundant, their prices are low. As they are the main factors in the production of grain, the price of grain is also low—and thus attractive for both local consumption and export. Labor-intensive goods, on the other hand, are very expensive to produce since labor is scarce and its price is high. Therefore, the country is better off importing those goods.

The comparative advantage is due to the fact that nations have various factors of production, the endowment of factors is the number of resources such as land, labor, and capital that a country has. Countries are endowed with multiple factors which explains the difference in the costs of a particular factor when a cheaper factor is more abundant. The theory predicts that nations will export the goods that make the most of the factors that are abundant in their soil and will import those that are made with scarce factors. Thus, this theory aims to explain the scheme of international trade that we observe in the world economy. Ohlin and Heckscher's theory advocates that the pattern of international trade is determined by differences in factor endowments rather than by differences in productivity. The endowments are relative and not absolute. One nation may have more land and workers than another but be relatively abundant in one of two factors. For example; The United States is a leading exporter of agricultural products, which reflects its great abundance of arable land, and on the other hand, China excels in the export of goods made with cheap labor such as textiles or shoes. This demonstrates why the United States has been a large importer of these Chinese products since it does not abound in cheap labor.

There are limited

exchange controls

(FDI) is permitted between countries, or foreigners are permitted to invest in the commercial operations of a country through a stock or corporate bond market

Foreign direct investment

The Magnification effect shows that actually makes the locally-scarce factor of production worse off (because increased trade makes the price index fall by less than the drop in returns to the scarce-factor induced by the Stolper–Samuelson theorem).

trade liberalization

money

Feenstra, Robert C. (2004). "The Heckscher–Ohlin Model". Advanced International Trade: Theory and Evidence. Princeton: Princeton University Press. pp. 31–63. 978-0-691-11410-1.

ISBN

Leamer, Edward E. (1995). . Princeton Studies in International Finance. Vol. 77. Princeton, NJ: Princeton University Press. ISBN 978-0-88165-249-9.

The Heckscher–Ohlin Model in Theory and Practice

Ohlin, Bertil (1967). Interregional and International Trade. Harvard Economic Studies. Vol. 39. Cambridge, MA: Harvard University Press.

A precisely defined, two-goods H–O model

An econometric analysis of factor prices, commodity prices, and endowments in intercontinental trade by NBER in 1999. It finds that 19th century trade patterns and economies can be successfully modeled within an H-O framework.