Question

Heckscher-Ohlin Model Theory of International Trade

Answer 1

The Heckscher-Ohlin model of International Trade is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources.

The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.

Assumptions Of The Heckscher Ohlin Model

The following assumptions pertain to the 2*2 model of Heckscher-Ohlin.

It is assumed that there are only two nations (1 and 2) with two goods for trade (X and Y) and two factors of production (capital and labour).

For producing the goods, both nations use the same technology and they use uniform factors of production.

In both countries, good X is labour intensive and Y is capital intensive.

The tastes and preferences of both nations are the same (both countries can be represented in the same indifference curve).

In both nations, the assumption of constant returns to scale is applicable for the production of goods X and Y.

In both nations, specialization in production is not complete.

Goods and factor markets in both nations are perfectly competitive.

There exists perfect mobility of factors of production within each country though international mobility is not possible.

There are no restrictions or limitations to the free flow of international trade. That is, there exist no transportation costs, tariffs, or like other obstructions either to control or to restrict the exports or imports.

It is assumed that there exists full employment of all resources in both nations. That is, there will not be any under employed resource in either nation.

The exports and imports between the nations are balanced. It means that the total value of the exports will be equal to the total value of imports in both nations.

Evidence Supporting the Heckscher-Ohlin Model

Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets.

The Linder hypothesis outlines and explains this theory. It states that countries with similar incomes require similarly valued products and that this leads them to trade with each other.