Heckscher-Ohlin Theory

of Factor Proportions

The Heckscher-Ohlin theory

According to this theory, one condition for trade is that countries

differ with respect to the availability of the factors of production.

The Heckscher-Ohlin theory focuses on the two most important factors of

production:

labor and capital.

Understanding The Concept of Factor Abundance

In the 2x2x2 model or two countries, two commodities & two factor model, implies that the capital rich country

will export capital intensive commodity and the labor rich country will export

labor intensive commodity

Differences in factor endowments not on differences in productivity determine patterns of trade.

Products differ according to the types of factors that they need as inputs.

A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance.

Factors of production: labor, capital, land, human resources, technology

Price Criterion for defining Factor Abundance

A country where capital is relatively cheaper and labor is relatively costly is

said to be capital rich country. Whereas a country where labor is relatively cheaper and capital is

relatively costly is said to be labor rich country.

Example #1:US and England have relatively more abundant capital yet imports goods more capital intensive than those it exports. US has special advantage on producing new products made with innovative technologies. Whereas in India and Egypt, labour is cheaper, and produce wheat with labor intensive techniques.

Example #2Steel production generally involves large amounts of expensive machines and equipment spread over perhaps hundreds of acres of land, but also uses relatively few workers. In the tomato industry, in contrast, harvesting requires hundreds of migrant workers to hand-pick and collect each fruit from the vine. The amount of machinery used in this process is relatively small.

Thus, if the two goods that a country can produce are steel and clothing, and if steel production uses more capital per unit of labor than is used in clothing production, then we would say the steel production is capital-intensive relative to clothing production. Also, if steel production is capital intensive, then it implies that clothing production must be labor-intensive relative to steel.