THE HECKSCHER-OHLIN MODEL

THE HECKSCHER-OHLIN MODEL

Trade patterns according to Heckscher-Ohlin theory

Refers to long-range direction of security or commodity to highest prices the security has reached and another line that connects the lowest prices at which the security has traded over the same period.

The theorem states that if two countries produce two goods and use two factors of production, that is, capital and labor to deliver these goods, each country will export the product that makes the most use of the element that is most abundant.

Production possibilities are determined by both capital and labor, whereby both capital and labor must be enough to avoid constraints and enhance factor substitution. With factor substitution, production possibility will have no hiccups.

Choosing the mix of input

Different amounts of factors are chosen by producers to manufacture products, and this will depend on the wage paid to labor and rental rate paid when renting capital. Producers tend to use more capital and labor in the production of goods if wages increase relative to the rental price.

Resources and output

According to Rybczynski theorem, when output prices are holding on constant as the factor amount of production increases, the supply of goods produced by this particular factor increases while other factors decrease

Trade and distribution of income

Labor and capital earnings can be affected by the fluctuation in prices. That is, the purchasing power of labor rises as prices of cloths rise and vice versa in the production of food. In international trade, countries with abundant factors gain from trade, whereas owners with scares factors experience losses.

WHY HECKSHER-OHLIN FAILS TO DESCRIBE REALITY

Heckscher and Ohlin decided to use a two by two by 2 model where two countries use two factors of production to produce goods in two different sectors and use different factor proportions. Two different countries have the same production technology; therefore products are provided at the same level despite where it is produced. This is unrealistic as trading countries produce similar industrial output f not equal.

Heckscher-Ohlin model is a factorial one, which means factors of production in a sector can be shifted easily. This is unrealistic as one cannot employ unskilled worker where skills and experience are needed since the outcome will not be the same as compared to how skilled personnel works.

References

Heckscher, Eli Filip and Gottthard Ohlin, Heckscher-Ohlin trade theory. The MIT Press, 1991.

Rybcyznski, Tadeusz M. ”Factor endowment and relative commodity prices”. Economica (1995):336-341.