Heckscher-Ohlin Model
What is Heckscher-Ohlin Model?
The Heckscher-Ohlin model predicts that countries export goods that intensively use their relatively abundant factor of production and import goods using their scarce factor.
Where Ricardo's comparative advantage rests on labor-productivity differences, Heckscher-Ohlin explains trade by differences in factor endowments (capital vs. labor vs. land). A capital-abundant country has comparatively cheap capital, so it specializes in and exports capital-intensive goods, while a labor-abundant country exports labor-intensive goods. The model assumes two countries, two goods, and two factors that are mobile within but not between countries.
Heckscher-Ohlin Model: a worked example
Meridia holds 900 machines and 300 workers, so 3 machines per worker; Kalvos holds 200 machines and 1,000 workers, so 0.2 machines per worker. Meridia is the capital-abundant country, so capital is comparatively cheap there and aircraft, which are capital-intensive, are comparatively cheap too. Say an aircraft trades for 4 shirts in Meridia before trade and 9 shirts in Kalvos. Open trade at a world price of 6 shirts per aircraft: Meridia collects 6 - 4 = 2 extra shirts on every aircraft it exports, and Kalvos obtains an aircraft for 3 fewer shirts than building one itself would have cost.
The mistake students make with heckscher-ohlin model
Students test abundance with totals rather than ratios. A country can own more machines than any trading partner and still be labor-abundant, because abundance means capital per worker measured against the other country, not capital in absolute terms. Meridia's 900 machines say nothing until they are set beside its 300 workers. The second slip swaps factor abundance for factor intensity: abundance describes what a country is endowed with, intensity describes the recipe a good is built from, and only the two together predict who exports what.
Heckscher-Ohlin Model questions
What is the difference between the Heckscher-Ohlin model and comparative advantage?
The Heckscher-Ohlin model explains where comparative advantage comes from, namely differences in factor endowments, while Ricardo's version takes differing labor productivity as given. Ricardo needs only one factor and a technology gap. Heckscher-Ohlin lets both countries share identical technology and still trade, because a country with abundant capital faces a lower rental rate and can therefore make capital-intensive goods more cheaply.
How do you tell which country is capital-abundant?
A country is capital-abundant when its capital-to-labor ratio is higher than its trading partner's, not when it holds more capital overall. Divide the capital stock by the workforce in each country and compare the two ratios. An alternative test uses factor prices: the capital-abundant country is the one where the rental rate on capital is low relative to the wage, which is what makes its capital-intensive goods cheap.
What does the Heckscher-Ohlin model predict about wages?
Heckscher-Ohlin predicts that opening to trade raises the real return to a country's abundant factor and lowers the return to its scarce factor, a result formalized as the Stolper-Samuelson theorem. In a labor-abundant country, exporting labor-intensive goods raises demand for workers and pushes wages up, while owners of scarce capital lose. Carried far enough, the model implies factor price equalization, with wages and rental rates converging across trading countries.
Related terms
Common comparisons
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