This theory also states that comparative advantage occurs from differences in factor endowments between the countries. The heckscherohlin theory according to this theory, one condition for trade is that countries differ with respect to the availability of the factors of production. The heckscher ohlins theory of international trade. Factor endowments and the heckscher ohlin theory chapter 5 slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. In chapter 5 the heckscherohlin factor proportions model, section 5. The factor proportions theorem of ohlin also reveals the classical lacuna of placing emphasis on the quality of a single factor, labour, as playing a key role in determining comparative. The heckscherohlin ho model was developed by two swedish economists eli heckscher in a 1919 article and his student bertil ohlin developed heckschers ideas further in his 1924 dissertation. Simply put, countries with plentiful natural resources will generally have a comparative advantage in products using those resources. Heckscherohlin factor proportions theory an explanation of comparative advantage in international trade that is based on differences in factor endowments between countries consider a situation in which two countries a and b produce two goods x and y. He studied at university in uppsala and gothenburg, completing his phd in uppsala in 1907.
The contribution of heckscherohlin theory the theory s main contribution is to point out that crosscountry differences in relative resource availability can explain trade it does not claim that differences in relative resource availability are the only reason why trade occurs 53. What are the weaknesses and criticisms of the theory you presented. So a skillintensive country like the usa will export skillintensive goods, such as scientific instruments. Hecksher ohlin theory of factor proportions slideshare. In the simplest form, it assumes labor and capital as two. The heckscherohlin theory by christopher herlihy on prezi. The comparative advantage of the different countries is explained, then, not by the difference in technology, but by the difference in the factor endowments. Ppt factor endowment theory powerpoint presentation. The ricardian model is a modification of adam smiths absolute advantage theory. Heckscher and ohlin theory, given by swedish economists eli hecksher and bertil ohlin, is an extension of theory of comparative advantage. Factor endowment theory 1 factor endowment theory heckscherohlin model 2 eli filip heckscher was a swedish political economist and economic historian. A swedish economist who received the 1977 nobel memorial prize in economics, along with james meade, for his research on international trade and.
Each country produce two commodities or goods labour intensive and capital. It is not a great theoretical triumph to identify conditions under which countries rich in petroleum. Heckscherohlin theory states that comparative advantage arises from differences in national. This theory introduces a second factor of production that is capital. Eli heckscher 1919 and bertil ohlin 1933 stated that comparative advantage arises from differences in national factor endowments. Sadly, its not very accurate by itself it explains northsouth trade quite well but not trade within the north but, if modified to take crosscountry differences in technology into account, it fits the data well so, a theory that combines the insights of ricardo and heckscherohlin might be best. Other articles where heckscherohlin theory is discussed.
A country exports those goods that use intensively the factors in which the country is abundantly supplied. Eli heckscher 1879 1952 heckscher was a swedish economist. The heckscherohlin model ho model is a general equilibrium mathematical model of international trade, developed by eli heckscher and bertil ohlin at the stockholm school of economics. Learning heckscherohlin model in five easy steps by omer. Heckscherohlin theory and new trade theory what do others say about this theory. Such a modern theory is generally known as heckscherohlin theory, because the groundwork for substantial developments in the theory is laid by eli heckscher 1919 and bertil ohlin 1933.
The heckscherohlin model model setup framework i 2x2x2 model. Therefore, the classical theory has useful welfare implication. Factor endowments and the heckscher ohlin theory chapter 5. These goods are known as capital intensive and labor intensive.
Ricardos theory suggests that comparative advantage arises from differences in productivity. These four propositions represent the core of the mainstream theory of foreign trade. It was developed by eli heckscher and bertil ohlin at the stockholm. Evidently, heckscherohlin theory concentrates on the bases of trade, whereas, the classical theory tried to demonstrate the gains from international trade.
Heckscher graduated from the university of uppsala in 1904, receiving his ph. With students in the policy and business schools with no formal economics background in mind, we propose an intuitively appealing and simple stepbystep graphical approach to explain the heckscherohlin ho model. Heckscherohlin factor proportions theory financial. This article explains the heckscher ohlin model, developed by eli heckscher and bertil ohlin in a practical way. The ricardian theory states that the basis of international trade is the comparative costs difference. The heckscherohlin model is an economic model that focuses on the dynamics of international trade. A free powerpoint ppt presentation displayed as a flash slide show on id. Other assumptions of the heckscherohlin model assumption 5. This section presents the mathematical formulation of the standard two good, two factor heckscherohlin ho model. Heckscherohlin theorem of international trade with figure.
A related, but much more subtle, assertion was put forward by two swedish economists, eli heckscher and bertil ohlin. Sources of comparative advantage factorendowment heckscher ohlin theory explains comparative advantage by differences in relative national supply conditions key determinant. As a matter of fact, ohlins theory begins where the ricardian theory of international trade ends. Subsequently three additional theorems have been posited. Heckscher ohlin model of trade and resources toolshero. Heckscher ohlins ho modern theory of international trade. But he did not explain how after all this comparative costs difference arises. Factor endowments and the heckscherohlin theorem michael a. Heckscher ohlin theory new trade theory critics state the theory is.
Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. This book presents the corrected and first complete translation from swedish of heckschers 1919 article on foreign trade a work of genius, in the words of paul samuelson as well as a translation from swedish of ohlins 1924 ph. Country a, let us assume, possesses an abundance of labour but a scarcity of capital. Heckscherohlin ho l early part of the 20th century. Pdf the heckscherohlin model in theory and practice. The heckscherohlin assumptionsbasics there are two countries, home and foreign two goods, cloth and food, and two resources, labor and land that are used. Firstly, it adopts a more realistic framework as compared to ricardian. The heckscherohlin model in theory and practice edward e. Introduction to heckscher ohlins ho theory v the modern theory of international trade has been advocated by bertil ohlin. Heckscherohlin theory factor endowment theory factor price equalization.
We will present the key assumptions of the model only as they are needed. After reading it, you understand the core of this strategy theory what is the heckscher ohlin model. The heckscher ohlins theory of international trade with its assumption. According to the heckscherohlin factorproportions theory of comparative advantage, international commerce compensates for the uneven geographic distribution of productive resources. Heckscherohlin model numerical example two goods, beer and cheese. The technologies used to produce the two goods are identical across the countries. Hence it is also known as heckscher ohlin ho model theorem theory. Hecsherohlin theorem, modern theory of international trade. He became a professor in 1909 at the then recently founded stockholm school of.
Their propositions were later formulated as the heckscherohlin theorem ho. The heckscherohlin theorem the heckscherohlin theorem says that countries will export products that use their abundant and cheap factor of production and imp slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. This video covers how differences in factor endowments affect trade, as is demonstrated through the heckscherohlin theorem. The new theory propounded by heckscher and ohlin went deeper into the underlying forces which cause differences in. It builds on david ricardos theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. Production of goods the production of goods and services requires capital and workers. The heckscherohlinsamuelson hos theorem states that a country which is relatively abundant in labor will have a comparative advantage in the laborintensive good and the relatively capital abundant country will have a comparative advantage in the capitalintensive good. The classical comparative cost theory did not satisfactorily explain why comparative costs of producing various commodities differ as between different countries. Agriculture industry textile industry mining industry food service industry economic gains from trade international. The heckscherohlin theory on the opposite, stresses on the analysis of bases of trade between two countries and makes contribution mainly to positive economics. Consumer tastes are the same across countries, and preferences for computers and shoes do not vary with a countrys level of income. I output can be produced with di erent input mixes depending on relative input prices.
Heckscher and ohlin theory has made invaluable contributions to the explanation of international trade. Ohlin has drawn his ideas from heckschers general equilibrium analysis. In easy five steps we show how to build the ho model and derive its three theorems, specifically, pattern of trade, factor price equalization, and income distribution. Though this theory accepts comparative costs as the basis of international trade, it makes several improvements in the classical comparative cost theory. Heckscherohlin theory of international trade slideshare. Let us make indepth study of the heckscherohlins theory of international trade. Countries have different relative abundance of factors of production. Due to the difficulty of predicting the patterns of trade in a world of many goods, the heckscherohlinvanek theorem that predicts the factor content of trade received attention in recent years.
Thus, it is the factor abundance rather than technology which determines the pattern of trade. If you continue browsing the site, you agree to the use of cookies on this website. The heckscher ohlin theory examines the effect of international trade on the earnings of factors of production in the two trading. Presentation on modern theory of international trade also called hecsherohlin theorem. Critical evaluation of heckscherohlin theory of international trade. Ricardian and heckscherohlin models of trade generally describe countries differences give important insights into patterns and determinants of trade. Production processes use factors of production with different relative intensity. Princeton studies in international finance, issn 00818070. The heckscherohlin theorem is one of the four critical theorems of the heckscherohlin model, developed by swedish economist eli heckscher and bertil ohlin his student. In the 1930s, the swedish economists eli heckscher and bertil ohlin developed a mathematical model for international trade. The heckscherohlin theory argues that trade occurs due to differences in labor, labor skills, physical capital, capital, or other factors of production across countries. Heckscherohlin model main theory of trade over past 60 years has been the heckscherohlin ho model key assumptions. What are the pragmatic problems with heckscherohlin model. The traditional theory emphasises upon the gains accruing to countries from foreign trade.