The Heckscher-Ohlin theory argues that differences in factors of production like labor, skills, capital, and land across countries leads to differences in productivity and explains why international trade occurs. Specifically, the theory posits that countries have a relative abundance of certain factors and production processes use factors more intensively, and this variation in endowments influences goods prices and causes trade. The two-factor Heckscher-Ohlin model focuses on labor and land as the two key factors of production that vary between just two countries and influence the productivity of cloth and food.
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Heckscher-Ohlin Theory
The Heckscher-Ohlin theory argues that differences in factors of production like labor, skills, capital, and land across countries leads to differences in productivity and explains why international trade occurs. Specifically, the theory posits that countries have a relative abundance of certain factors and production processes use factors more intensively, and this variation in endowments influences goods prices and causes trade. The two-factor Heckscher-Ohlin model focuses on labor and land as the two key factors of production that vary between just two countries and influence the productivity of cloth and food.
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Heckscher-Ohlin theory
• While trade is partly explained by differences in labor
productivity, it also can be explained by differences in resources across countries. • The Heckscher-Ohlin theory argues that international differences in labor, labor skills, physical capital or land (factors of production) create productive differences that explain why trade occurs. – Countries have relative abundance of factors of production. – Production processes use factors of production with relative intensity. Factor Heckscher-Ohlin Model Two Factor Heckscher-Ohlin Model 1. Labor and land are resources important for production. 2. The amount of labor and land varies across countries, and this variation influences productivity. 3. The supply of labor and land in each country is constant. 4. Only two goods are important for production and consumption: cloth and food. 5. Competition allows factors of production to be paid a “competitive” wage, a function of their productivities and the price of the good that it produces, and allows factors to be used in the industry that pays the highest wage/rate. 6. Only two countries are modeled: domestic and foreign