h-o theory

1. Heckscher–Ohlin
Theory
Mintu Butani(04)

2. Heckscher – Ohlin theory

3. Other names
• Modern theory of international trade.
• H-O theory/ theorem.
• Factor proportions theory.
• Factor endowments theory.
• Relative factor endowments theory.
• H-O model.

4. Factor endowments
• Land
• Labour
• Capital
• Natural resources
• Climate etc…

5. The Heckscher-Ohlin Theorem
 T h e Heckscher-Ohlin Theorem says thatcountries
will export products that use their abundant and
cheap factor of production and import products that
use the countries' scarce factor.

6. Two Factor Heckscher-Ohlin Model
Two countries: home and foreign.
Two goods: cloth and food.
Two factors of production: labor and capital.
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4. Production of food is land-intensive and production of cloth is
labour-intensive in both countries.
5. Perfect competition prevails in all markets.

7. 2×2×2 model
• The original H–O model assumed that the only difference between
countries was the relative abundances of labour and capital.
• The original Heckscher–Ohlin model contained two countries, and
two commoditieshad that could be produced. Since there are two
factors of production this model is sometimes called the "2×2×2
model"

8. The Heckscher-Ohlin Theorem
• Note that when trade occurs, the labor-abundant country (Home)
exports the labor-intensive good (cloth) and
• The land-abundant country (Foreign) exports the land-intensive good
(food)
• In general, each country exports the good that makes intensive use
of the resource that is abundant in that country
• This is called the Heckscher-Ohlin Theorem

9. • The H-O model assumes that the only difference between countries
are these variations in the relative endowments of factors of
production.

10. Slide 4-6 Copyright © 2003 Pearson Education, Inc.
• In the real world, while trade is partly explained by
differences in labor productivity, it also reflects
differences in countries’ resources.
• The Heckscher-Ohlin theory:
• Emphasizes resource differences as the only source of
trade
• Shows that comparative advantage is influenced by:
• Relative factor abundance (refers to countries)
• Relative factor intensity (refers to goods)
• Is also referred to as the factor-proportions theory

11. The contribution of Heckscher-Ohlin theory
• The theory’s main contribution is to point out that cross-
country differences in relative resource availability can
explain trade
• It does not claim that differences in relative resource
availability are the only reason why trade occurs

12. The Heckscher-Ohlin Assumptions—Governments
• Governments do not interfere with the smooth functioning of
markets; there are no taxes, subsidies, tariffs, quotas, etc.
• However, although there is free trade in goods and services, there is
no cross-border movement of resources, such as labor

13. The Heckscher-Ohlin Assumptions—Technology
• Technological knowledge is the same in both countries
• Goods are produced (with land and labor) using technologies that
satisfy Constant Returns to Scale.
• That is, if the producer of a commodity, say, doubles the amounts used of all
resources, then the amount produced will have to double also.

14. The Heckscher-Ohlin Assumptions—Factor
Intensities
• The production of food is land-intensive and the production of cloth is
labor-intensive
• That is, the number of workers per acre (L/T) is always higher in cloth
production than in food production

15. Limitations of H-O
• Unrealistic assumption
• Restrictive
• One sided theory
• Static in nature
• Consumers demand ignores
• Other factor neglected

16. Thank You…