Question

1. Explain how the Heckscher-Ohlin theorem supports international trade between nations.

Answer 1

One of the most important models of international trade is the Heckscher-Ohlin (H-O; aka the factor proportions) model. This essentially builds upon the Ricardian model by the addition of a second output element. It represents one of the simplest general equilibrium models in its two-by-two-by-two version, implying two commodities, two variables, and two nations, which simultaneously allows for interactions through factor markets, product markets, and national markets.

Such market-wide interactions are one of the important economic lessons demonstrated in this model's performance. With the H-O model, we learn how changes in supply or demand in one market will force their way through the factor markets and, through trade, the international markets and affect both domestic and foreign products and factor markets. To put it another way, all markets are interconnected everywhere.

Among the important findings is that foreign trade will enhance economic productivity but that trade can also result in a redistribution of income between various output factors. In other terms, some will benefit from trade, some will lose, but there is always a possibility that the net results are positive.