Heckscher - Ohlin

Theory
Of
International Trade
-by
Naresh Kumar.P (Fk-2133)
Niveditha.M(Fk-2076)
Outline
HO Model in a nutshell
2 x 2 x 2 Model
Assumptions of Heckscher-Ohlin
Model
Analysis of Heckscher-Ohlin Model
Criticism against the model
HO Model in a nutshell

Mathematical model of international

trade
This model essentially says that
countries will,
1) Export products that utilize their
abundant and cheap factor of production.
2) Import products that utilize the
countries' scarce factors.
The 222 model
This model has variable factor proportions
between countries:
Highly developed countries have a
comparatively high ratio of capital to
labour in relation to developing countries.

The developing nation has labour

abundant
Cont..

The original H-O model assumed that the

only difference between countries was the
relative abundances of labour and capital.
Since there are two (homogeneous)
factors of production this model is called
the "222 model".
Assumptions Of Theory
Differ in terms of factor
abundance
Both countries have identical
production technology
Both countries are assumed to
have identical demand
conditions
Perfect competition
Commodities have the same
price everywhere
Analysis of Heckscher-Ohlin Model

The following theorems form the basis of the

Heckscher - Ohlin model of international trade:
Heckscher - Ohlin Theorem
Stolper - Samuelson Theorem
Factor Price Equalization Theorem
Rybczynski Theorem
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

Example:
P(C)=ar+bw
 Factor Price Equalization Theorem

states that the relative prices for two

identical factors of production in the
same market will eventually equal
each other because of competition.
An often-cited example of factor
price equalization is wages
Rybczynski Theorem

When the amount of one factor of

production increases, the production
of the good which uses that
particular factor of production
intensively increases relative to the
increase in the factor of production
Cont..
Criticism against the HeckscherOhlin model

Identical production function

Homogeneous capital
No unemployment
No rooms for firms
THANK U.