relative factor endowments theory/ 2*2*2 model/ hecksher -ohlin theory/assumptions of hecksher ohlin theory/ limitations of hecksher ohlin theory/hecksher ohlin theorem/factor endowments theory, H-O Theory

1. The
Heckscher – Ohlin
Theory
Seminar by ,
CLINCY
CLEETUS
S2. M.COM.
ROLL:NO:10
DEPT OF
COMMERCE
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2. OVERVIEW
• Other names.
• Factor endowments.
• Heckscher – Ohlin theory.
• Assumptions.
• Limitations.
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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.
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4. Factor endowments
• Land
• Labour
• Capital
• Natural resources
• Climate etc…
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5. Assumptions of Heckscher Ohlin's H-O Theory
Heckscher-Ohlin'stheory explainsthe modern approach to
internationaltrade on the basis of following assumptions :-
• Thereare two countries involved.
• Each country has two factors (labour and capital).
• Each countryproduce two commodities or goods (labour intensive and
capital intensive).
• Thereis perfect competition in bothcommodity and factor markets.
• All production functions are homogeneous of the first degreei.e.
production function is subjectto constant returnstoscale.
• Factors are freely mobile within a country but immobile between
countries.
• Twocountries differ in factor supply.
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6. • Each commodity differs in factor intensity.
• The production function remains the same in different countries for the
samecommodity. Fore.g. If commodity A requiresmore capital in one
country then same is the case in other country.
• Thereis full employment of resourcesin both countries and demand are
identical in both countries.
• Trade is free i.e. there are notrade restrictions in the form of tariffs or
non-tariff barriers.
• Thereare no transportation costs.
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7. Heckscher – Ohlin theory
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8. • The theory explains in a two country, two
factor and two commodity (
2*2*2 model ) framework.
1. what determines the comparative advantage ?
2. How trade influence the income of the factors of
production ?
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9. • The theory believes that differentcountries are endowed with
varying proportions of different factors of production.
• Some countries have large population and large labour resource.
The others have abundance of capital but short of labour
resource.
• Capital abundant country presents a higher capital ratio than
whata labourabundant countypresents.
• Thus, a country withlarge labour forcewillbe able to produce
those goods at lowercost that involve labour intensivemode of
production.
• Similarlythe countries withlarge supply of capital will specialize
in those goods that involvecapital intensivemode of
production. 9

10. • The former will exportits labourintensive goods to the latter
and import capital intensive goods there from.
• After the trade, both the countries willhaveboth types of goods
at the least cost.
• Allthis means that the theoryholds good if the capitalabundant
country has a distinct preference for the labour intensivegoods
andthe labour abundant countryhas a distinctpreference for
capital intensive goods. Ifit is not, the theory may not hold
good.
• Again the theory does not hold good if the labour abundant
country is technologicallyadvancedin capital intensivegoods or
if capitalabundant economy is technologicallyadvancedinthe
production of labour intensive goods. 10

11. Limitations of H-O
Theory• UnrealisticAssumptions
• Restrictive
• One-sided theory
• Static innature
• Wijnhold’s criticism
• Consumer’s demand ignored
• Haberler’s criticism
• Leontif paradox
• Other factors neglected 11

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