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The
Heckscher – Ohlin
Theory
Seminar by ,
CLINCY
CLEETUS
S2. M.COM.
ROLL:NO:10
DEPT OF
COMMERCE
1
OVERVIEW
• Other names.
• Factor endowments.
• Heckscher – Ohlin theory.
• Assumptions.
• Limitations.
2
Other names
• Modern theory of international trade.
• H-O theory/ theorem.
• Factor proportions theory.
• Factor endowments theory.
• Relative factor endowments theory.
• H-O model.
3
Factor endowments
• Land
• Labour
• Capital
• Natural resources
• Climate etc…
4
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.
5
• 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.
6
Heckscher – Ohlin theory
7
• 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 ?
8
• 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
• 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
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
12

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The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory

  • 1. The Heckscher – Ohlin Theory Seminar by , CLINCY CLEETUS S2. M.COM. ROLL:NO:10 DEPT OF COMMERCE 1
  • 2. OVERVIEW • Other names. • Factor endowments. • Heckscher – Ohlin theory. • Assumptions. • Limitations. 2
  • 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. 3
  • 4. Factor endowments • Land • Labour • Capital • Natural resources • Climate etc… 4
  • 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. 5
  • 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. 6
  • 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 ? 8
  • 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
  • 12. 12