Heckscher-Ohlin Model

The Heckscher-Ohlin model (H-O model) was constructed to understand the role of productive resources in international trade, analyzing an economy in which two goods are produced using two factors of production. It is a general equilibrium model that extends some important results of the comparative advantage theory developed by David Ricardo. One of the principal results of the model is that the countries export the products that employ their abundant factors of production intensively, and import commodities that utilize scarce factors of production. That result is known as the Heckscher-Ohlin theorem. The model was developed in the 1920s by Swedish economists Eli Heckscher and his student Bertil Ohlin (winner of the Nobel Prize in Economics in 1977), and has been extended since by other economists like Paul Samuelson, Wolfgang Stolper, Jaroslav Vanek, and Ronald Jones.

The original formulation of the H-O model refers to the case of two countries, two factors of productions—capital and labor—that have unlimited supplies, and two final goods (for that reason, sometimes the model is called the 2×2×2 model). In the model, the economies use the same technology of constant returns of scale, and the production of the goods differs between countries in the intensity of utilization of inputs. The intensity is about the proportions in which the two factors of production (capital and labor) are used. There is private ownership of the productive capital (that is, the physical machines and equipment that are used in production) and perfect mobility of factors within a country, but controls in the mobility of labor and capital between nations. Additionally, each commodity has the same price everywhere and its production takes place under perfect competition in both countries.

These assumptions widen the conception of the basic Ricardian model of international trade, because this model only supposes the existence of one factor of production—labor—that is required to produce all the goods and services in the economy. The productivity of labor is assumed to vary across countries, which implies a difference in technology between nations. It was the difference in technology that motivated advantageous international trade in the model.

In the H-O model the specialization of the production is incomplete, because of differences in factor [Page 812]endowments. A capital-abundant country is one that is well endowed with capital relative to another country. This gives that country the possibility to produce the good which uses relatively more capital in the production process (the capital-intensive good). As a result, if these two countries were not trading initially, i.e., they were in autarky, the price of the capital-intensive good in the capital-abundant country would be offered in a minor quantity (due to its extra supply) relative to the price of the good in the other country. Similarly, in the labor-abundant country the price of the labor-intensive good would be bid down relative to the price of that good in the capital-abundant country.

Once trade is allowed, profit-seeking firms will move their products to the markets that temporarily have the higher price. Thus, the capital-abundant country will export the capital-intensive good since the price will be temporarily higher in the other country. In the same way, the labor-abundant country will export the labor-intensive good. Commercial flows will rise until the prices of both goods are equalized in the two markets.

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