Heckscher-Ohlin Model

Published Oct 25, 2023

Definition of Heckscher-Ohlin Model

The Heckscher-Ohlin Model is an economic theory that explains international trade patterns based on the relative availability and price differences of factors of production, such as labor, capital, and natural resources, between countries. The model suggests that a country will specialize in and export goods that require factors of production it has in abundance, while importing goods that require factors it lacks.

Example

For example, consider two countries: Country A, which has an abundance of skilled labor, and Country B, which has an abundance of natural resources. According to the Heckscher-Ohlin Model, Country A will specialize in industries that heavily rely on skilled labor, such as technology or research and development, while Country B will specialize in industries that heavily rely on natural resources, such as mining or agriculture.

As a result, Country A will export high-skilled labor-intensive goods and import natural resource-intensive goods from Country B, while Country B will export natural resource-intensive goods and import high-skilled labor-intensive goods from Country A. This specialization and trade between the two countries are driven by the differences in factor endowments.

Why the Heckscher-Ohlin Model Matters

The Heckscher-Ohlin Model provides insights into why countries engage in international trade and the pattern of trade between them. By explaining how factor endowments influence trade patterns, the model helps policymakers and economists understand the benefits and potential challenges of international trade. Moreover, the model allows countries to identify their comparative advantages and make informed decisions about the industries and goods they should focus on to maximize their economic welfare.