The Heckscher–Ohlin theorem is one of the four critical theorems of the

Heckscher–Ohlin model The Heckscher–Ohlin model (, H–O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative ad ...

, developed by Swedish economist

Eli Heckscher Eli Filip Heckscher (24 November 1879 – 23 December 1952) was a Swedish political economist and economic historian. Biography Heckscher was born in Stockholm, son of the Jewish Danish-born businessman Isidor Heckscher and his spouse Rosa Meyer ...

and

Bertil Ohlin Bertil Gotthard Ohlin () (23 April 1899 – 3 August 1979) was a Swedish economist and politician. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. He was also leader of the People's Party, a social-libe ...

(his student). In the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good." The critical assumption of the Heckscher–Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same. The relative abundance in capital will cause the capital-abundant country to

produce Produce is a generalized term for many farm-produced crops, including fruits and vegetables (grains, oats, etc. are also sometimes considered ''produce''). More specifically, the term ''produce'' often implies that the products are fresh and g ...

the capital-intensive good cheaper than the

labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...

-abundant country and vice versa. Initially, when the countries are not trading: * the

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

of the capital-intensive good in the capital-abundant country will be bid down relative to the price of the good in the other country, * the price of the labor-intensive good in the labor-abundant country will be bid down relative to the price of the good in the other country. Once trade is allowed, profit-seeking firms will move their products to the markets that have (temporary) higher price. As a result: * the capital-abundant country will export the capital-intensive good, * the labor-abundant country will export the labor-intensive good. The Leontief paradox, presented by

Wassily Leontief Wassily Wassilyevich Leontief (russian: Васи́лий Васи́льевич Лео́нтьев; August 5, 1905 – February 5, 1999), was a Soviet-American economist known for his research on input–output analysis and how changes in one ec ...

in 1951,Leontief, Wassily (1954) Domestic Production and Foreign Trade - The American Capital Position Reexamined, Economia Internazionale, (VII): p. 1. found that the U.S. (the most capital-abundant country in the world by any criterion) exported labor-intensive commodities and imported capital-intensive commodities, in apparent contradiction with the Heckscher–Ohlin theorem. However, if labor is separated into two distinct factors, skilled labor and unskilled labor, the Heckscher–Ohlin theorem is more accurate. The U.S. tends to export skilled-labor-intensive goods, and tends to import unskilled-labor-intensive goods.

Related theorems

Factor price equalization Factor price equalization is an economic theory, by Paul A. Samuelson (1948), which states that the prices of identical factors of production, such as the wage rate or the rent of capital, will be equalized across countries as a result of internatio ...

– The relative prices for two identical factors of production will eventually be equalized across countries because of international trade. * Stolper–Samuelson theorem – A rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor. *

Rybczynski theorem The Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz Rybczynski (1923–1998). It states that at constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expans ...

– When only one of two

factors of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...

is increased there is a relative increase in the production of the good using more of that factor. This leads to a corresponding decline in that good's relative price as well as a decline in the production of the good that uses the other factor more intensively.

References

Literature

* Appleyard, Field, & Cobb. (2006). ''International Economics'' (5th ed.). McGraw–Hill Irwin. . * Case, Karl E. & Fair, Ray C. (1999). ''Principles of Economics'' (5th ed.). Prentice-Hall. .

External links

"The Heckscher-Ohlin Trade Model."
- Heckscher-Ohlin Model. Web. 16 March 2015. {{DEFAULTSORT:Heckscher-Ohlin theorem Economics theorems International trade theory