The Heckscher-Olin Model is an equilibrium model of international trade that builds on David Ricardo's theory of comparative advantage. The model demonstrates that a country will have a comparative advantage in producing goods that are intensive in the factor with which it is relatively abundant.
This theorem makes two key assumptions. The first, is that each country will differ in the factors of production it has available. One country may have a large and relatively uneducated population with an abundant amount of labor, and perhaps less land and capital [machines and buildings]. Another country may be technologically advanced and have high capital but relatively lower availability of land or labor. The second assumption that the theorem holds is that preferences for one good over another across countries are similar. Therefore, relative costs of production [rather than relative demand for goods] dictate how much of a good is produced and consumed prior to specialization and trade.
Given these assumptions, Heckscher and Ohlin reached the conclusion that countries will have a comparative advantage in goods that are produced with the factor of production [land, labor or capital] that the country has an abundance of. This will logically lead to higher exports of those goods. This theorem differs from the Ricardian Model and Neoclassical Model because it addresses the question of why countries have comparative advantages in particular commodities instead of simply explaining how specialization and trade are beneficial. It is also apt to briefly note that the Neoclassical model differs from the Ricardian in that the latter holds that increasing opportunity costs will lead to partial specialization whereas the former assumes complete specialization of production.
A common example of the Heckscher-Ohlin Model is in the production of computers and shoes by the United States and Brazil. Since the US has abundant capital, the cost of capital will likely be lower than wages or rents, and since the production of computers is capital-intensive, the US should focus production on computers. Brazil has a relative amplitude of labor and will therefore produce mainly shoes. Both countries have the best chances of increasing overall consumption of both computers and shoes if they specialize in the good that is the cheapest to produce and import the other good[1]
- ↑ Grieco, Joseph M., and G. John Ikenberry. State Power and World Markets: The International Political Economy. Chapter 2 - The Economics of International Trade. New York: W.W. Norton & Co., 2003.
What is the Heckscher-Ohlin Model?
The Heckscher-Ohlin model is a mathematical theory used in international trade to evaluate the export pattern of a country relative to the natural resources at their disposal. According to this model, countries majorly export items they can produce in abundance given their natural, land, labor and capital endowments. The Heckscher-Ohlin model was developed in the 1930as by two Swedish economists, Eli Heckscher and Bertil Ohlin. This model is otherwise known as the H-O model or 2x2x2 model. This model assumes it is best for countries to export materials they can produce in surplus and efficiently. In international trade, the model is also used to evaluate the equilibrium of trade between two countries given their different production capabilities and natural resources.
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How is the Heckscher-Ohlin Model Used?
The Heckscher-Ohlin model maintains that the specific natural resources that a country has would give it an advantage in producing related goods, this is coupled with land, capital, and human resources. This model shows that a country will export goods or resources it has in abundance. This is why countries that have certain resources in abundance tend to have a comparative advantage than countries that do not in terms of exportation. The original work that led to the development of the Heckscher-Ohlin model was a paper written in 1919 by Swedish economists, Eli Heckscher at the Stockholm. The model was subsequently expanded in the 1930s. The core premises of the Heckscher-Ohlin model are;
- The model explains how resources are imbalanced throughout the world.
- Naturally, resources are not evenly distributed across the world, some parts of the world have certain resources in abundance while some have other resources in abundance.
- Since each country has its own unique natural resources and specialized area of production, mathematically, a country will export resources it has in abundance.
- The Heckscher-Ohlin model is not limited to natural resources or commodities, it also accounts for factors of production such as labor, land and capital and how they affect exportation.
- The Heckscher-Ohlin model helps to find a trade balance between the two countries involved in international trade.
Evidence Supporting the Heckscher-Ohlin Model
It is expected that every economic or mathematical model has evidence supporting it, in the case of the Heckscher-Ohlin Model however, most economists could not find any evidence to support it. This does not mean that the premises of this model are untrue, it only shows there is a lack of evidence for the model. Aside from the Heckscher-Ohlin model, several other models have been developed to explain the rationale behind international trade and how countries or exporters have their specialized production. Also, these models try to explain how a trade balance is achieved between the two countries. For instance, the Linder hypothesis maintains that countries with similar incomes have similar needs and thereby trade with each other.
Real World Example of the Heckscher-Ohlin Model
The Heckscher-Ohlin Model can be studied extensively in the real world trade between different countries. For example, while some countries are the largest exporters of oil and petroleum products, some have coal in abundance, some cotton, some precious metals, while others have agricultural products in abundance. The Heckscher-Ohlin model explains the imbalance of natural resources throughout the world and gives an explanation of why countries export the resource they have at most. For example, OPEC countries are the largest exporters of oil, this does not mean they do not have other natural resources such as coal, metal, and others, but they have oil reserves in abundance, wherein lies their strength. The Heckscher-Ohlin model also amplifies the benefits of international and how exporting resources that are naturally abundant in some countries help other countries.
Related Topics
- Trade Balance: Surplus and Deficit
- Level of Trade
- Gain from Trade
- Intra-Industry Trade
- National Trade Data Bank
- Capital Account [Economics]
- Current Account
- Debtor Nation
- Merchandise Trade Balance
- Export of Goods and Services and Percentage of GDP
- Heckscher-Ohlin Model
- Linder Hypothesis