This document discusses and compares theories of comparative advantage and the Heckscher-Ohlin theory of international trade. The comparative advantage theory states that countries benefit from specializing in goods they can produce relatively more efficiently. The Heckscher-Ohlin theory extends this by attributing comparative advantage to differences in factor endowments like capital, labor, and land between countries. It predicts that countries will export goods intensive in their abundant factors and import goods intensive in their scarce factors. While comparative advantage focuses on opportunity costs, Heckscher-Ohlin explains specialization through differences in national resources.

1. Comparative Advantage trade Theory:
This Theory is considered to be an extension for Absolute Advantage Trade theory, David
Ricardo Stated that it makes sense for a country to specialize in the production of those goods
that it produces most efficiently and to buy the goods that it produces less efficiently from
other countries
To understand the logic we need to understand by an example
Example:
Suppose there are two countries of equal size, Northland and Southland, assume two products
be clothes and food. Output of each country as follows
Here Southland has an absolute advantage over Northland in both food and clothing products
Food Clothes
Northland 50 50
Southland 200 100
Total 250 150
The opportunity cost of Northland producing one tonne of food is one tonne of clothes. The
opportunity cost of Southland producing one tonne of food is 0.5 tonne of clothes. This
implies Southland has a comparative advantage in food production, because of its lower
opportunity cost of production with respect to Northland. Northland has a comparative
advantage in clothes production.
Food Clothes
Northland 0 100
Southland 300 50
Total 300 150
If you can see there is an advantage in terms of production of food and the output of the two
countries together has increased. This is called comparative advantage
HECKSCHER-OHLIN Theory:
As comparative advantage theory is an extension for absolute advantage trade theory, this
theory is like a comparative advantage trade theory with conditions called Factor
endowments.
In this trade theory Eli Heckscher and Bertil Ohlin explain that comparative advantage arises
from differences in national factor endowments. By factor endowments they mean resources
like land, labour and capital. Because nations have varying factor endowments explains the
differences in factor costs.
Food
Northland:100tonnes
Southland:400tonnes
Clothes
Northland:100tonnes
Southland:200tonnes

2. Heckscher-Ohlin theory predicts that countries will export those goods that make intensive
use of factors that are locally abundant while importing goods that make intensive use of
factors that are locally scarce.
Example:
U.S. has long been a substantial exporter of agricultural goods, reflecting in part its unusual
abundance of arable land. Whereas China has excelled in the export of goods produced in
labour intensive manufacturing industries. Thus China has relative abundance of low cost
labour. The U.S. which lacks abundant low cost-labour has been primary importer of these
goods.
Main concept to be seen here is a country may have larger absolute amounts of land and
labour than another country, but be relatively abundant in one of them.
ComparisonbetweenComparative advantage and Heckscher-Ohlin
theory:
Comparative Advantage Theory Heckscher-Ohlin theory
This theory is an extension to Absolute
advantage trade theory. Here it is based on
Opportunity Cost
This theory is based on comparative
advantage concept but attributes it to factor
Endowments
Fails to explain why a country specializes in
production of certain goods
Explains on the basis of factors like land,
capital and labour on how a country
specializes
It just assumes that countries do differ in
productivity
Justifies the assumptions on the differences
of the productivity.
Only one factor is considered i.e. labour More than one factor is considered
Technology is assumed to be varying across
the countries
Technology is assumed to be same across all
the countries
Relatively it has lesser ability to explain trade
patterns
Better ability to explain observed trade
patterns
It has large number of variations compared to
Heckscher-Ohlin theory
When used for large number of countries it
tends to confirm the existence of the Leontief
paradox
Heckscher-Ohlin theory explains and specifies where the comparative advantage comes from
(endowments)

3. Bibliography
http://homepages.wmich.edu/~mryan/E380/Notes/H-O.pdf
http://www.economics.utoronto.ca/morrow/morrow_rho_Aug2010.pdf
http://phase1.nccr-trade.org/images/stories/mira/comparative%20advantage.pdf
http://www.researchgate.net/post/The_Heckscher-
Ohlin_theory_is_preferred_to_the_Ricardo_theory_by_economists_because_it_makes_fewer
_simplifying_assumptions_What_is_your_view
http://ecoarticles.blogspot.in/2012/05/hecksher-ohlin-theory.html