The
Heckscher – Ohlin
Theory
Seminar by ,
CLINCY
CLEETUS
S2. M.COM.
ROLL:NO:10
DEPT OF
COMMERCE
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OVERVIEW
• Other names.
• Factor endowments.
• Heckscher – Ohlin theory.
• Assumptions.
• Limitations.
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Other names
• Modern theory of international trad
• H-O theory/ theorem.
• Factor proportions theory.
• Factor endowments theory.
• Relative factor endowments theory.
• H-O model.
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Factor endowments
• Land
• Labour
• Capital
• Natural resources
• Climate etc…
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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 subject to constant returns toscale.
• Factors are freely mobile within a country but immobile between
countries.
• Twocountries differ in factor supply. 5

• Each commodity differs in factor intensity.
• The production function remains the same in different countries for the
same commodity. Fore.g. If commodity A requiresmore capital in one
countrythensameis the casein 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 theform of tariffs or
non-tariff barriers.
• Thereare no transportation costs.
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Heckscher – Ohlin theory
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• 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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• 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

• 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

Limitations of H-O
Theory
• UnrealisticAssumptions
• Restrictive
• One-sided theory
• Static in nature
• Wijnhold’s criticism
• Consumer’s demand ignored
• Haberler’s criticism
• Leontif paradox
• Other factors neglected 11

1. Unrealistic Assumptions
• Besides the usual assumptions of two countries,
two commodities, no transport cost, etc.
• Ohlin's theory also assumes no qualitative
difference in factors of production, identical
production function, constant return to scale,
etc.
• All these assumptions makes the theory
unrealistic one.
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2. Restrictive
• Ohlin's theory is not free from
constrains.
• His theory includes only two
commodities, two countries and two
factors.
• Thus it is a restrictive one.
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3. One-Sided Theory
• According to Ohlin's theory, supply plays a
significant role than demand in determining
factor prices.
• But if demand forces are more significant, a
capital abundant country will export labour
intensive good as the price of capital will be
high due to high demand for capital.
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4. Static in Nature
• Like Ricardian Theory the H-O Model is
also static in nature.
• The theory is based on a given state of
economy and with a given production
function and does not accept any
change.
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5. Wijnholds's Criticism: According to Wijnholds, it is not
the factor prices that determine the costs and commodity
prices but it is commodity prices that determine the factor
prices.
6. Consumers' Demand ignored: Ohlin forgot an important
fact that commodity prices are also influenced by the
consumers' demand.
7. Haberler's Criticism: According to Haberler, Ohlin's
theory is based on partial equilibrium. It fails to give a
complete, comprehensive and general equilibrium analysis.
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8. Leontief Paradox: American economist Dr. Wassily Leontief
tested H-O theory under U.S.A conditions.
He found out that U.S.A exports labour intensive goods and
imports capital intensive goods, but U.S.A being a capital
abundant country must export capital intensive goods and
import labour intensive goods than to produce them at home.
This situation is called Leontief Paradox which negates H-O
Theory.
9. Other Factors Neglected: Factor endowment is not the sole
factor influencing commodity price and international trade.
The H-O Theory neglects other factors like technology,
technique of production, natural factors, different qualities of
labour, etc., which can also influence the international trade.
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