The explains trade patterns based on countries' . It predicts nations will export goods that use their abundant factors intensively, while importing products relying on scarce factors.
This model builds on , showing how differences in , , and resources shape trade. It also explores how trade affects factor prices and income distribution, linking international economics to domestic markets.
Assumptions of the Heckscher-Ohlin Model
Core Model Structure
Top images from around the web for Core Model Structure
Production and Operations Management—An Overview | OpenStax Intro to Business View original
Is this image relevant?
Understanding the Business Environment | OpenStax Intro to Business View original
Is this image relevant?
Welcome to Economics – Introduction to Microeconomics View original
Is this image relevant?
Production and Operations Management—An Overview | OpenStax Intro to Business View original
Is this image relevant?
Understanding the Business Environment | OpenStax Intro to Business View original
Is this image relevant?
1 of 3
Top images from around the web for Core Model Structure
Production and Operations Management—An Overview | OpenStax Intro to Business View original
Is this image relevant?
Understanding the Business Environment | OpenStax Intro to Business View original
Is this image relevant?
Welcome to Economics – Introduction to Microeconomics View original
Is this image relevant?
Production and Operations Management—An Overview | OpenStax Intro to Business View original
Is this image relevant?
Understanding the Business Environment | OpenStax Intro to Business View original
Is this image relevant?
1 of 3
Utilizes a 2x2x2 framework involving two countries, two goods, and two factors of production (typically labor and capital)
Assumes identical production technologies and consumer preferences across countries
Posits in all markets
Incorporates constant returns to scale in production
Allows perfect factor mobility within countries but prevents factor movement between countries
Key Predictions
Countries export goods that intensively use their relatively abundant factor
International trade leads to between trading partners
states an increase in a good's relative price increases the real return to the factor used intensively in its production
Example: If the price of textiles (labor-intensive) rises, wages will increase more than proportionally
predicts an increase in one factor's endowment leads to a more than proportional increase in the output of the good using that factor intensively
Example: A surge in a country's labor force may disproportionately boost production in labor-intensive industries (garment manufacturing)
Factor Endowments and Trade Patterns
Understanding Factor Endowments
Represent the relative abundance of production factors (labor, capital, land) in a country
Countries considered factor-abundant when they possess a higher ratio of that factor compared to trading partners
describes the relative use of different factors in producing a good
Example: Automobile manufacturing (capital-intensive) vs. textile production (labor-intensive)
Comparative advantage tends to arise in goods using abundant factors intensively
Trade Pattern Dynamics
Countries specialize in and export goods utilizing their abundant factors intensively
Nations import goods that intensively use their scarce factors
Shifts in factor endowments over time can alter comparative advantage and trade patterns
Example: A developing country's increasing capital stock may shift its exports from agricultural goods to manufactured products
Changes in one factor's endowment can disproportionately impact output in related industries
Example: Discovery of oil reserves (increase in natural resources) may boost petrochemical production more than other sectors
Factor Prices and Goods Prices
Price Relationships and Effects
Stolper-Samuelson theorem links changes in goods prices to factor prices in international trade
Increase in a good's relative price boosts the real return to its intensively used factor while decreasing returns to other factors
Example: Rising computer prices may increase returns to skilled labor but decrease returns to unskilled labor
causes factor price changes to be proportionally larger than goods price changes
Factor price equalization suggests free trade can substitute for factor mobility, leading to cross-country convergence in factor prices
Short-Term Considerations
Specific factors model examines how factor immobility in the short run affects trade gains distribution
Changes in relative factor endowments can shift the production possibility frontier, impacting goods' relative prices and factor prices
Example: Rapid increase in a country's skilled workforce may lower skilled wages relative to unskilled wages
Limitations of the Heckscher-Ohlin Model
Empirical Challenges
found U.S. exports were relatively labor-intensive despite being capital-abundant, challenging the model's validity
Model struggles to explain significant , especially among developed economies
Example: Simultaneous import and export of automobiles between countries
Simplifying Assumptions
Identical production technologies across countries often unrealistic
Example: Technological disparities between developed and developing nations can significantly impact trade patterns
Factor immobility between countries increasingly challenged by globalization of labor and capital markets
Two-factor simplification may not capture complexity of modern production processes
Example: High-tech industries often require specialized labor, advanced technology, and significant R&D investment
Dynamic Considerations
Static nature fails to account for changes in factor endowments, technology, and consumer preferences over time
Overlooks demand-side factors like consumer preferences and income levels in determining trade patterns
Example: Changing consumer tastes for organic products can influence agricultural trade patterns regardless of factor endowments