Heckscher Ohlin Theory

Eli Heckscher (1919) and Bertil Ohlin (1933) stated that

comparative advantage arises from differences in national
factor endowments.
the more abundant a factor, the lower its cost.
Ricardos theory suggests that comparative advantage arises
from differences in productivity.
Heckscher-Ohlin Theory states that comparative advantage
arises from differences in national factor endowments
resources like land, labor, and capital.

Heckscher-Ohlin theory predicts that

countries will:
-Export goods that make intensive use of those factors that are
locally abundant.
-Import goods that make intensive use of factors that are locally
scarce
Basic Assumptions
There are two Countries involved.
Each country has two factors Labor and Capital.
Each country produces two goods (Labor intensive and Capital
Intensive).
There is perfect competition in both commodity and factor
markets.
All production functions are homogeneous of the first degree
i.e. production function is subject to constant returns to scale.
Perfect mobility of factors within a country but immobility
between the 2 countries.
Two countries differ in factor supply.
Basic Assumptions (contd.)
Each commodity differs in factor intensity.
The production function remains the same in different
countries for the same commodity. For e.g. If commodity A
requires more capital in one country then same is the case in
other country.
There is full employment of resources in both countries and
demand are identical in both countries.
Trade is free i.e. there are no trade restrictions in the form of
tariffs or non-tariff barriers.
There are no transportation costs.
 The Theory
The theory explains in a two country, two
factor and two commodity framework.
What determines the comparative
advantage ?
How trade influence the income of the
factors of production?
 Explanation
The theory believes that different countries are endowed with
varying proportions of different factors of production.
Some countries have large population and large labour resource.
The others have abundance of capital but short of labour resource.
Capital abundant country presents a higher capital ratio than what
a labour abundant county presents.
Thus, a country with large labour force will be able to produce
those goods at lower cost that involve labour intensive mode of
production.
Similarly the countries with large supply of capital will specialize in
those goods that involve capital intensive mode of production.
Explanation (contd.)

The former will export its labour intensive goods to the latter
and import capital intensive goods there from.
After the trade, both the countries will have both types of
goods at the least cost.
All this means that the theory holds good if the capital
abundant country has a distinct preference for the labour
intensive goods and the labour abundant country has a
distinct preference for capital intensive goods. If it is not, the
theory may not hold good.
Again the theory does not hold good if the labour abundant
country is technologically advanced in capital intensive goods
or if capital abundant economy is technologically advanced in
the production of labour intensive goods.
Heckscher-Ohlin Diagram
Limitations of H-O Theory
Unrealistic Assumptions
Leontif paradox
THANK YOU

Prepared by:
Apporv Srivastava (PRN: 15021021028)
Shubh Tulsyan (PRN: 150210210128)
Hazrat Bilal Mujadadi (PRN:)
Manas Bajpai (PRN:)
Section-A