The document summarizes the Heckscher-Ohlin theory of international trade. The theory was developed by Swedish economists Eli Heckscher and Bertil Ohlin and proposes that countries will export goods that make intensive use of their abundant and cheap production factors, and import goods that make intensive use of their scarce and expensive factors. For example, a labor-abundant country will export labor-intensive goods and import capital-intensive goods. The theory is based on assumptions including two countries, two goods, two factors of production, identical technologies, and the absence of trade barriers. It predicts that capital-abundant countries will specialize in and export capital-intensive goods, while labor-abundant countries will specialize

2. The Modern Theory Of Factor Endowment :
The Heckscher – Ohlin Theory : -
•Introduction :-
The theory was developed by Swadish
Economist Bertil Ohlin(1899-1979) on the basis of work
by his Teacher the Swadish Economist Eli Filip
Hecksher(1879-1952) .
•In recognition of his ideas as described in his path-
breaking book , “Interregional & International Trade”.
For his work on the theory Ohlin was awarded the
Nobel Prize for Economics .

3. •Defination :-
• A nation will export the commodity whose production requires the
intensive use nation’s relatively abundant and cheap factor and
import the commodity whose production requires the intensive use
of the nation relatively scare and expensive factor .
• In other word the relatively labour rich nation export the relatively
labour intensive commodity and imports the relatively capital
intensive commodity.
• This means that Nation 1export X commodity . Because X is labour
intensive and import Y commodity and vice versa on Nation 2.

4. Assumptions of The Theory :
1. There are 2 nation , 2 Commodity ,2 factor of production.
2. Both nation’s are same technology in production .
3. Commodity X is labour intensive & Y is capital intensive in both
nation .
4. Both the commodities are produce under constant return to scale
in both nation .
5. There is incomplete specialization in production in both nation’s .
6. Testes are equal in both nations.
7. There is perfect competition in both commodies and factor markets
in both nations.

5. Assumptions :
9.There is no transportion costs , tariffs or other obstructions to the
free flow of international trade .
10. All resources are fully employed in both nations .
11.International trade between the two nations is balanced.
On the basis of these assumes the Heckscher – Ohlin theorem
predicted that the capital surplus country specialises in the production
and export of capital intensive goods and the labour surplus country
specialise in the production and exports of labour intensive goods .

6. Criterion of Factor Abundance :
• There are 2 criterion of classifying a country as labour /capital
abundant or labour/capital scare .
1. Physical Criterion
2. Price Criterion

7. Physical Criterion :
• It is based on the physical criterion.
• The country whose capital labour ratio is greater is called capital
abundant .
• Let’s assume that Germany and India are two countries , then
Germany is capital abundant if : Kg/Lg >Ki/Li
• Here Kg is quantity of capital in Germany & Ki in India ; Lg is quantity
of labour in Germany and Li in India.