Heckscher-Ohlin model

The Heckscher-Ohlin model or HO-model is an important model in international trade. The Heckscher Ohlin theory discusses how countries with different factor endowments can benefit from international trade. The theory uses the insights of Ricardo’s comparative advantage and extends the model to multiple factors of production.

On this page, we discuss the Heckscher-Ohlin theory definition, the theory assumptions, and theorems that follow from the Heckscher-Ohlin model. In particular, both the Stolper-Samuelson theorem and the Rybczynski theorem are strongly related to the HO model.

Heckscher-Ohlin Theory Definition

The HO model starts from the factor endowment theory, which states that countries are likely to be abundant in different types of resources. If this is the case, then Heckscher and Ohlin argue that countries will export those products that are produced using the abundant and cheap production factors and import goods that require factors that are scarce in the country.

For example, consider a county that has plenty of labor but little capital. We can expect that this country will specialize in producing products that require a lot of manual labor. Since labor is abundant, it is cheap. At the same time, the country will import capital-intensive goods and services.

Interestingly, the Heckscher-Ohlin model can also explain the existence of international trade even when the production functions are the same in both countries. This is different from Ricardo’s comparative advantage (i.e. a different production function or technology), where one country is comparatively better at producing one of the goods under consideration. This is because the HO model introduces a second production factor in addition to labor. If the endowments in both production factors is different, international trade will be profitable for both countries.

The Heckscher-Ohlin model is sometimes referred to as the 2x2x2 model. That’s because it considers 2 countries, producing 2 goods, using 2 production factors. Next, let’s turn to the main assumptions of the Heckscher-Ohlin international trade model.

Heckscher-Ohlin theory assumptions

It is very important to understand the Heckscher-Ohlin theory assumptions. In particular, there are 5 assumptions we should keep in mind

  1. identical production technology in both countries
  2. constant returns to scale when producing goods
  3. the technologies used to produce the goods are different
  4. factor mobility within each country but no factor mobility between countries
  5. input prices are the same in both countries

Other related theorems

There are at least three important theorems that follow from the Heckscher-Ohlin model. First, there is the Stolper-Samuelson theorem, which argues that relative changes in the prices of the output goods drive changes in the relative prices of the input goods used to produce them. Another important theorem is the Rybczynski theorem, which argues that as the amount of a production factor goes up, the production of the good increases relative to the increase in the production factor itself. Finally, there is the factor price equalization theorem. This theorem states that factor prices will converge together with the traded goods’ prices if the HO model holds.

Summary

We discussed the Heckscher-Ohlin model of international trade, which extends the comparative advantage of Ricardo. In particular, rather than considering just one production factor, the Heckscher-Ohlin model considers two production factors.