Basic Idea of Heckscher Theory Theory

1. Heckscher-Ohlin Theory of Factor Endowments

2. Heckscher-Ohlin Theory of Factor Endowments
Major Issues
➢Background of the Theory
➢Assumptions of Heckscher-Ohlin Theory
➢ Criteria for measuring abundance

3. Heckscher-Ohlin Theory of Factor Endowments
1. Background of the Theory
❖
The theory was developed by the Swedish economist Bertil Ohlin (1899–1979) on the basis of work by his
teacher the Swedish economist Eli Filip Heckscher (1879–1952). For his work on the theory, Ohlin was
awarded the Nobel Prize for Economics.
Some countries are relatively well-endowed with capital while others are rich in labour. The richness may be
determined on the basis of physical quantity or in terms of prices.
It is differences in factor endowments of different countries and different factor-proportions needed for
producing different commodities that account for difference in comparative costs. This new theory is therefore-
called Heckscher-Ohlin theory of international trade.

4. Heckscher-Ohlin Theory of Factor Endowments
Difference in the prices of Commodities
Difference in Cost of the production of the commodities
Difference in the Prices of factors
Difference in the Factor Abundance
Pattern of International Trade

5. Heckscher-Ohlin Theory of Factor Endowments
2. Assumptions of Heckscher-Ohlin Theory
𝟐 × 𝟐 × 𝟐 Model (Two Countries, Two Commodities, Two Factors of Production)
Two Commodities
Commodity X and Y Commodity X and Y
Two Factors
Capital and Labour Capital and Labour
Two Countries
Country A Country B

6. Heckscher-Ohlin Theory of Factor Endowments
𝟐 × 𝑸 = 𝒇(𝟐 × 𝒍, 𝟐 × 𝒌) 𝟒 × 𝑸 = 𝒇(𝟒 × 𝒍, 𝟒 × 𝒌) 𝟗 × 𝑸 = 𝒇(𝟗 × 𝒍, 𝟗 × 𝒌)
2. Assumptions of Heckscher-Ohlin Theory
All Factors of Production are homogeneous (Law of constant returns to scale)

7. Heckscher-Ohlin Theory of Factor Endowments
• The tastes in the two countries are identical.
• The two countries have different relative factor
endowments namely capital and labour. Based on the
relative factor endowments, countries are classified as
capital abundant, labor abundant.
• Goods are classified as capital intensive and labor-
intensive.
• There are no trade restrictions between the two countries.
• Perfect Competition
Cont….
2. Assumptions of Heckscher-Ohlin Theory

8. Heckscher-Ohlin Theory of Factor Endowments
America
Capital-rich
Country
Capital
Intensive
Product
India
Labour-rich
Country
Labour
intensive
product

9. America Capital Automobile India Labour Handicraft
Heckscher-Ohlin Theory of Factor-Endowments

10. Heckscher-Ohlin Theory of Factor-Endowments
CRITERIA TO MEASURE FACTOR ABUNDANCE OF THE COUNTRY
Physical Criterion Price Criterion
According to this criterion, a
country is said to be
relatively capital abundant, if
and only if, it is endowed
with a higher proportion of
capital to labour than the
other country.
The criterion lays down that a
country having capital relatively
cheap and labour relatively
costly is capital-abundant and
vice-versa, irrespective of the
physical quantities.

11. Heckscher-Ohlin Theory of Factor Endowments
PHYSICAL CRITERIA PRICE CRITERIA
(India)
𝑲
𝑳
> (𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑲
𝑳
(𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑲
𝑳
> (𝑰𝒏𝒅𝒊𝒂)
𝑲
𝑳
(India)
𝑳
𝑲
> 𝑨𝒎𝒆𝒓𝒊𝒄𝒂
𝑳
𝑲
(𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑳
𝑲
> (𝑰𝒏𝒅𝒊𝒂)
𝑳
𝑲
( 𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑷 𝒌
𝑷 𝒍
> 𝑰𝒏𝒅𝒊𝒂
𝑷 𝒌
𝑷 𝒍
(𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑷 𝒍
𝑷 𝒌
> (𝑰𝒏𝒅𝒊𝒂)
𝑷 𝒍
𝑷 𝒌
(India)
𝑷 𝒌
𝑷 𝒍
> 𝑨𝒎𝒆𝒓𝒊𝒄𝒂
𝑷 𝒌
𝑷 𝒍
(India)
𝑷 𝒍
𝑷 𝒌
> (𝑨𝒎𝒆𝒓𝒊𝒄𝒂)
𝑷 𝒍
𝑷 𝒌
Richness of America in Capital and Labour Richness of America in Capital and Labour
Richness of India in Capital and Labour Richness of India in Capital and Labour

12. Heckscher-Ohlin Theory of Factor Endowments

13. Heckscher-Ohlin Theory of Factor-Endowments

14. Heckscher-Ohlin Theory of Factor-Endowments
Factor-Price
Equalisation Theory
Stopler-Samuelson
Theory
Rybczynski Theory
Components of Heckscher
Ohlin-theory

15. Thanks