Hecksher Ohlin Theory of Factor Proportions

1. Heckscher-Ohlin
Theory
of Factor
Proportions

2. The Heckscher-Ohlin theory
According to this theory, one condition for
trade is that countries differ with respect to
the availability of the factors of
production.

3. The Heckscher-Ohlin theory focuses on the
two most important factors of production:
labor and capital.

4. Understanding The Concept of
Factor Abundance
In the 2x2x2 model or two countries, two
commodities & two factor model, implies
that the capital rich country will export
capital intensive commodity and the labor
rich country will export labor intensive
commodity

5.  Differences in factor endowments not on differences
in productivity determine patterns of trade.
 Products differ according to the types of factors that
they need as inputs.
 A country has a comparative advantage in producing
products that intensively use factors of production
(resources) it has in abundance.
 Factors of production: labor, capital, land, human
resources, technology

6. Price Criterion for defining
Factor Abundance
A country where capital is relatively cheaper
and labor is relatively costly is said to be
capital rich country. Whereas a country
where labor is relatively cheaper and capital
is relatively costly is said to be labor rich
country.

7. Example #1:
US and England have relatively more
abundant capital yet imports goods more
capital intensive than those it exports. US
has special advantage on producing new
products made with innovative
technologies. Whereas in India and Egypt,
labour is cheaper, and produce wheat with
labor intensive techniques.

8. Example #2
Steel production generally involves large
amounts of expensive machines and
equipment spread over perhaps hundreds of
acres of land, but also uses relatively few
workers. In the tomato industry, in contrast,
harvesting requires hundreds of migrant
workers to hand-pick and collect each fruit
from the vine. The amount of machinery used
in this process is relatively small.

9. Thus, if the two goods that a country can
produce are steel and clothing, and if steel
production uses more capital per unit of labor
than is used in clothing production, then we
would say the steel production is capital-
intensive relative to clothing production. Also,
if steel production is capital intensive, then it
implies that clothing production must
be labor-intensive relative to steel.