The Heckscher-Ohlin model assumes huge importance in the context of international trade. Developed by two renowned Swedish economists named Eli Heckscher and Bertil Ohlin, this general equilibrium model of international trade is based on four economic theorems. The Heckscher-Ohlin model has been developed on the Ricardian theory of international trade, considering the fact that pattern of trade is guided by the endowments of factors of production.
Analysis of Heckscher-Ohlin Model
The following theorems form the basis of the Heckscher-Ohlin model of international trade:
- Heckscher-Ohlin Theorem
- Stolper-Samuelson Theorem
- Factor Price Equalization Theorem
- Rybczynski Theorem
The Heckscher-Ohlin theorem states that a labor-abundant country will specialize in and export labor-intensive commodity, whereas a capital-abundant country will specialize in and export capital-intensive commodity.
According to the Stolper-Samuelson theorem, under the assumptions of constant returns to scale and perfect competition, an increase in relative price of a good will result in an increase in return to that factor of production, which is being used intensively in the production of that good and a decrease in return to the other factor of production that is being used less intensively.
As per the Factor Price Equalization theorem if free trade leads to equalization of the prices of goods between countries, then it will lead to equalization of prices of the factors of production (labor and capital) as well.
Rybczynski theorem depicts the relationship between changes in endowments with the output of goods, given full employment. According to this theorem, a rise in endowment of a factor of production in a country will lead to a rise in production of the good, which utilizes that factor more intensively, and a fall in the output level of the other good, which uses that factor less intensively.
Assumptions of Heckscher-Ohlin Model
The Heckscher-Ohlin model is based on the following assumptions:
- Countries involved in international trade differ in terms of factor abundance. One country needs to be labor-abundant and the other country being capital-abundant.
- Commodities can be categorized in terms of factor intensity. One commodity is labor-intensive and the other commodity is capital-intensive. This in turn implies that there is no possibility of factor intensity reversal.
- Both the countries involved in trade use same production technology and identical ranking of factor intensity of commodities.
- Both countries are assumed to have identical demand conditions.
- Production is carried out as per the CRS production function.
- Perfect competition persists in both countries.
- Open trade or free trade policy is followed in both the countries.
The Heckscher-Ohlin proposition is as follows:
The capital-abundant country will export capital-intensive commodity and import labor-intensive commodity and the labor-abundant country will export labor-intensive commodity and import capital-intensive commodity.
Heckscher-Ohlin model assumes huge importance in the field of international trade. However, there are contradictions of this model as well. Wassily Leontief has come up with a contradiction of Heckscher-Ohlin model. He has shown that in spite of being capital abundant, USA mostly exports labor-intensive goods and imports capital-intensive goods.