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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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0% found this document useful (0 votes)
1K views7 pages

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.

Uploaded by

rajkumarkv
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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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

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