5. Assumptions of Heckscher Ohlin's H-O Theory
Heckscher-Ohlin'stheory explainsthe modern approach to
internationaltrade on the basis of following assumptions :-
• Thereare two countries involved.
• Each country has two factors (labour and capital).
• Each countryproduce two commodities or goods (labour intensive and
capital intensive).
• Thereis perfect competition in bothcommodity and factor markets.
• All production functions are homogeneous of the first degreei.e.
production function is subjectto constant returnstoscale.
• Factors are freely mobile within a country but immobile between
countries.
• Twocountries differ in factor supply.
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6. • Each commodity differs in factor intensity.
• The production function remains the same in different countries for the
samecommodity. Fore.g. If commodity A requiresmore capital in one
country then same is the case in other country.
• Thereis full employment of resourcesin both countries and demand are
identical in both countries.
• Trade is free i.e. there are notrade restrictions in the form of tariffs or
non-tariff barriers.
• Thereare no transportation costs.
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8. • The theory explains in a two country, two
factor and two commodity (
2*2*2 model ) framework.
1. what determines the comparative advantage ?
2. How trade influence the income of the factors of
production ?
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9. • The theory believes that differentcountries are endowed with
varying proportions of different factors of production.
• Some countries have large population and large labour resource.
The others have abundance of capital but short of labour
resource.
• Capital abundant country presents a higher capital ratio than
whata labourabundant countypresents.
• Thus, a country withlarge labour forcewillbe able to produce
those goods at lowercost that involve labour intensivemode of
production.
• Similarlythe countries withlarge supply of capital will specialize
in those goods that involvecapital intensivemode of
production. 9
10. • The former will exportits labourintensive goods to the latter
and import capital intensive goods there from.
• After the trade, both the countries willhaveboth types of goods
at the least cost.
• Allthis means that the theoryholds good if the capitalabundant
country has a distinct preference for the labour intensivegoods
andthe labour abundant countryhas a distinctpreference for
capital intensive goods. Ifit is not, the theory may not hold
good.
• Again the theory does not hold good if the labour abundant
country is technologicallyadvancedin capital intensivegoods or
if capitalabundant economy is technologicallyadvancedinthe
production of labour intensive goods. 10
