The ho theory is also known as the factor proportions theory or factor endowment theory. The heckscherohlin theory argues that trade occurs due to differences in labor, labor skills, physical capital, capital, or other factors of production across countries. Determinants of international trade in the heckscherohlin. Countries have different relative abundance of factors of production. The heckscherohlin theory of trade predicts patterns of trade based on nations relative factor endowments. Eli heckscher 1919 and bertil ohlin 1933 laid the groundwork for substantial developments in the theory of international trade. However, i find weak and mixed evidence that heckscherohlin forces can potentially bias tests of the ricardian model. Ohlin 1933 stressed the effect which free trade would tend to have on the distribution of income within countries, viz. The basic insight of the heckscher ohlin ho model is that traded commodities are really bundles of factors land, labor, and capital.
Given the assumptions of the model, a country will export the commodity that intensively uses its relatively abundant factor it is also referred to as the factorproportions theory. The exchange of commodities internationally is therefore indirect factor arbitrage, transferring the services of otherwise immobile factors of production from locations where these factors are abundant to loca. Factor price factor endowment capital labor ratio factor price equalization incomplete specialization. Pdf the heckscherohlin model in theory and practice. Eco364 international trade chapter 3 heckscher ohlin. The pattern of trade reflects the relative endowment of productive factors relatively laborabundant countries tend to export relatively laborintensive com.
This approach is also known as the factor proportions theory. A principal result of the ho theory is the heckscher ohlin theorem which states the following. Secondly, in the heckscherohlin model comparative advantage is determined by di. The standard heckscher ohlin theory explains the pattern of commodity trade in terms of factor endowment. So long as both goods are being produced, factor rewards r, w depend only on goods prices px and py, not on factor endowments k, l. Learn the basic assumptions of the heckscher ohlin ho model, especially factor intensity within industries and factor abundancy within countries. Our approach is simple because it needs only two pieces of information, specifically about factor endowments and factor intensities, and from. The factor endowments theory the factor endowments theory a. This paper studies impacts of factor endowment on international trade in a general. However, there are significant exceptions to the heckscherohlin theorem. Simply put, countries with plentiful natural resources will generally have a comparative advantage in products using those resources.
Factor endowments and hecksher ohlin theory chapter 5. Other articles where heckscherohlin theory is discussed. Such a modern theory is generally known as heckscherohlin theory. Such a modern theory is generally known as heckscher ohlin theory. The factor proportions model was originally developed by two swedish economists, eli heckscher and his student bertil ohlin, in the 1920s. He was professor of political economy and statistics at the stockholm school of economics from 1909 until 1929, when he exchanged that chair for a research eli filip heckscher.
Consider a situation in which two countries a and b produce two goods x and y. The heckscherohlin theory of international trade chapter 11. Trade theory heckscher ohlin theory plus the leonteif paradox. A swedish economist who received the 1977 nobel memorial prize in economics, along with james meade, for his research on international trade and international capital movements. Factor endowment theory production function labour. Recent contributions to the pure theory of international trade have relied heavily on the variableproportions account of trade developed by eli heckscher and bertil ohlin2, who linked exportimport patterns to factor endowments and methods of production. A capitalabundant country will export the capitalintensive good, while the laborabundant country will export the laborintensive good.
Given the assumptions of the model, a country will export the commodity that intensively uses its relatively abundant factor it is also referred to as the factor proportions theory. Factorendowment heckscher ohlin theory explains comparative advantage by differences in relative national supply conditions key determinant. Production processes use factors of production with different relative intensity. The factorendowmentsdriven model fed model has errors much greater than the hov model.
A country exports those goods that use intensively the factors in which the country is abundantly supplied. In this lesson, youll learn about the heckscherohlin model of international trade as well as associated concepts, such as comparative advantage and factor endowments. Two productive factors i because of, this is referred to as the 2x2x2 model. Factor proportions and the heckscher ohlin theorem 1. The difference in commodity price is due to the difference in factor prices i. The heckscher ohlin ho theorem a theorem that predicts the pattern of trade in the ho model. Heckscherohlin theory factor endowment theory factor price equalization. Countries di er only in terms of their relative factor endowments. Factor endowments and the heckscher ohlin theory chapter 5. In the heckscherohlin model countries have the same production. A statement and appraisal of the heckscherohlin theory, the economic journal, volume 70, issue. Assumptions of heckscher ohlins ho theory heckscherohlinstheory explainsthe modern approach to internationaltrade on the basis of following assumptions. Factor price equalization in heckscher ohlin model ozgun ekici carnegie mellon university tepper school of business preliminary and incomplete july 31, 2006 abstract this paper investigates the likelihood of factor price equalization under the simple assumptions of heckscher ohlin theory. The heckscherohlin theory culminates in what is now generally known as the heckscherohlin theorem hot of the pattern of international trade.
The standard heckscherohlin theory explains the pattern of commodity trade in terms of factor endowment. We demonstrate that rybczynskis classic comparative. This new theory is thereforecalled heckscher ohlin theory of international trade. This theorem, developed by heckscher 19191949 and ohlin 1933, states that when there are differences in factor endowments between two otherwise identical countries, each country will export that commodity. A swedish economist who received the 1977 nobel memorial prize in economics, along with james meade, for his research on international trade and. The heckscher ohlin model a theory of international trade that highlights the variations among countries of supplies of broad categories of productive factors labor,capital,and land,none of which may be specific to any one sector was developed by two swedish econ.
Heckscher and ohlin theory modern theory of international trade. According to the heckscherohlin factorproportions theory of compar ative advantage. According to the heckscherohlin factorproportions theory of compar. This chapter introduces and discusses the heckscher ohlin ho theory of trade and its implications. Under strong assumptions, the heckscher ohlin model predicts not only that factor endowment differences alone determine trade patterns, but that they do so in a particularly simple way. H is labundant, so the relative wage rate is lower and. In chapter 5 the heckscherohlin factor proportions model, section 5. The heckscherohlin theorem is one of the four critical theorems of the heckscherohlin model, developed by swedish economist eli heckscher and bertil ohlin his student. The classical comparative costs theory developed by adam smith, ricardo and mill maintained that comparative cost advantage of the trading countries was based on the differences in the productivity of. Such a modern theory is generally known as heckscher ohlin theory, because the groundwork for substantial developments in the theory is laid by eli heckscher 1919 and bertil ohlin 1933. Heckscher s original article explains the impact of differences in factor endowments on intercountry income distribution and international specialization, and demonstrates. Hecksher ohlin lectures 4 the factor endowments theory the.
They compare ohlin s version with the modern interpretations and extensions of the theory as developed by paul samuelson, ronald jones, and many other contemporary economists. Start studying factor endowments and hecksher ohlin theory chapter 5. Unemployment is the vital question in any trade conflict. Heckscherohlin factor proportions theory financial. The heckscher ohlin model model setup setup again 1. Earlier work in heckscherohlin trade models was focused on the pricing relationships embodied in heckscherohlin theory.
Learn vocabulary, terms, and more with flashcards, games, and other study tools. The comparative advantage of the different countries is explained, then, not by the difference in technology, but by the difference in the factor endowments. To see this, remember that the four input coefficients alx amount of labor used per unit of output of x etc. Eli filip heckscher was a swedish political economist and economic historian. In chapter 5 the heckscher ohlin factor proportions model, section 5. Find, read and cite all the research you need on researchgate. He studied at university in uppsala and gothenburg, completing his phd in uppsala in 1907. Hov model, trade is a linear function of the endowments. Lectures, 4 the factor endowments theory the factor endowments theory a.
Does this by hypothesizing that comparative advantage is ultimately due to international. Introduction assumptions of the theory factor intensity, factor abundance, and the shape of the production frontier factor endowments and the heckscher ohlin theory factor price equalization and income distribution empirical tests of the heckscher ohlin model 7. Factor endowment, the choice of technology, and the volume of. Heckscher ohlin factor proportions theory an explanation of comparative advantage in international trade that is based on differences in factor endowments between countries. With students in the policy and business schools with no formal economics background in mind, we propose an intuitively appealing and simple stepbystep graphical approach to explain the heckscher ohlin ho model. This theory also states that comparative advantage occurs from differences in factor endowments between the countries.
Pdf heckscherohlin and other theories researchgate. Sources of comparative advantage factor endowment heckscherohlin theory explains comparative advantage by differences in relative national supply conditions key determinant. Superiority of heckscher ohlin theory over the classical theory 3. Heckscherohlin theory excludes unemployment by the very formulation of the model, in which all factors including labour are employed in the production. Second, productivity differences across industries do not bias tests of the ho model in my sample. Jun, 2014 the heckscher ohlin theory of trade predicts patterns of trade based on nations relative factor endowments. Heckscherohlin theory, and the modern theory of international trade is a modern extension of the classical approach and attempts to explain the pattern of comparative advantage. Pdf classical economists did not explain the reason, or cause for the difference in relative commodity prices. Rybczynskis theorem in the heckscherohlin world university of. Heckscher and ohlin theory, given by swedish economists eli hecksher and bertil ohlin, is an extension of theory of comparative advantage. According to the theory, trade arises due to the differences in the relative prices of different goods in different countries. In other words, the relative amount of labour, land and capital available in the country. It states that the capitalabundant country will export the capitalintensive good and the laborabundant country will export the laborintensive good. A related, but much more subtle, assertion was put forward by two swedish economists, eli heckscher and bertil ohlin.