Last Updated 28 Mar 2021

The Heckscher-Ohlin Model

Category Trade
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The Heckscher-Ohlin model

The Heckscher-Ohlin model is a mathematical model of the international trade and its balance. It is established upon the theory of David Ricardo for the competitive advantage and it strives to predict the arrangements of the international trade and production, which are based on the capacity of a given country to trade. Its essence consist in the statement that the countries that produce, will be exporting the goods, which manufacturing use their plentful and cost-competitive factors and will import goods that use the scarce factors of the country.

Here we are talking about the factors of production, which are the land, labour and capital. Their abundance or their lack defines in which products the country has a competitive advantage. Meaning that they have advantage for producing those goods, for which the necessary factors and inputs are abundant in the country, therefore it is cheaper to produce them locally and export them instead of importing them.

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We can give the example of country like Belgium – here the labor and the land factors are not abundant, therefore the goods that require for the production those factors will be imported, because then it will be more cost effective. And vice-versa, because in Belgium there are a lot of engineers, technicians and it is rather well technologically developed country, it will be more advantageous to export goods, which require for their production those abundant factors – for ex. computers, IT etc.

Criticism on the H-O model & Leontief Paradox

There is much criticism upon that model; therefore I’m going to state the most important of it here: * The little predictive power of that model, which was a critic by Bernstein and Weinstein, who claimed that the H-O model and its factor endowments of each country are not a reliable forecast. * The identical production function – the H-O model postulate that the production functions are corresponding for all the countries that are involved in the international trade. But it’s an unrealistic statement, because even between the most developed countries the competition is determined from various factors like technology etc.

In the H-O model, the capital is by definition assumed as consistent, identical and transferable to any form, since the capital goods may have many forms. There is no explanation how the capital is measured. So all this leads to a controversy around the concept of homogenous capital.  The unemployment factor is excluded from the model, which makes it really unrealistic.  The assumption that all firms are identical, because all the countries have the same production function is another weak point of the model.

The H-O model was supported by politicians, because it gave them an excuse for restriction upon the immigration lows at that time.  Probably the most significant criticism is called the Leontief Paradox. Mr. Wassily Leontief conducted an econometric test in 1954 of the implication of the H-O model in the US. And he found out that nevertheless the US was a country rich on capital it still was exporting mostly goods for the production of which the labor factor was decisive or ‘labor intensive goods’. And they were importing products, produced in countries with abundant capital as well or ‘capital intensive goods’. This paradox proves that the H-O model is not taking into account all of the necessary factors in order to be more accurate and applicable to any given country.

Response by H-O The main response was that the model has been further developed and extended in order for it to be more realistic. Thus by taking into consideration new features, factors and variables in the international trade (like tariffs for ex.) the predictive power of the model has been increased. The three scientists that contributed the most for those ameliorations are Paul Samuelson, Ronald Jones, and Jaroslav Vanek.

The Heckscher-Ohlin Model essay

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