The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory

The
Heckscher – Ohlin
Theory
Seminar by ,
CLINCY
CLEETUS
S2. M.COM.
ROLL:NO:10
DEPT OF
COMMERCE
1

OVERVIEW
• Other names.
• Factor endowments.
• Heckscher – Ohlin theory.
• Assumptions.
• Limitations.
2

Other names
• Modern theory of international trade.
• H-O theory/ theorem.
• Factor proportions theory.
• Factor endowments theory.
• Relative factor endowments theory.
• H-O model.
3

Factor endowments
• Land
• Labour
• Capital
• Natural resources
• Climate etc…
4

Assumptions of Heckscher Ohlin's H-O Theory
Heckscher-Ohlin'stheory explainsthe modern approach to
internationaltrade on the basis of following assumptions :-
• Thereare two countries involved.
• Each country has two factors (labour and capital).
• Each countryproduce two commodities or goods (labour intensive and
capital intensive).
• Thereis perfect competition in bothcommodity and factor markets.
• All production functions are homogeneous of the first degreei.e.
production function is subjectto constant returnstoscale.
• Factors are freely mobile within a country but immobile between
countries.
• Twocountries differ in factor supply.
5

• Each commodity differs in factor intensity.
• The production function remains the same in different countries for the
samecommodity. Fore.g. If commodity A requiresmore capital in one
country then same is the case in other country.
• Thereis full employment of resourcesin both countries and demand are
identical in both countries.
• Trade is free i.e. there are notrade restrictions in the form of tariffs or
non-tariff barriers.
• Thereare no transportation costs.
6

• The theory explains in a two country, two
factor and two commodity (
2*2*2 model ) framework.
1. what determines the comparative advantage ?
2. How trade influence the income of the factors of
production ?
8

• The theory believes that differentcountries 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
whata labourabundant countypresents.
• Thus, a country withlarge labour forcewillbe able to produce
those goods at lowercost that involve labour intensivemode of
production.
• Similarlythe countries withlarge supply of capital will specialize
in those goods that involvecapital intensivemode of
production. 9

• The former will exportits labourintensive goods to the latter
and import capital intensive goods there from.
• After the trade, both the countries willhaveboth types of goods
at the least cost.
• Allthis means that the theoryholds good if the capitalabundant
country has a distinct preference for the labour intensivegoods
andthe labour abundant countryhas a distinctpreference for
capital intensive goods. Ifit is not, the theory may not hold
good.
• Again the theory does not hold good if the labour abundant
country is technologicallyadvancedin capital intensivegoods or
if capitalabundant economy is technologicallyadvancedinthe
production of labour intensive goods. 10

Limitations of H-O
Theory• UnrealisticAssumptions
• Restrictive
• One-sided theory
• Static innature
• Wijnhold’s criticism
• Consumer’s demand ignored
• Haberler’s criticism
• Leontif paradox
• Other factors neglected 11

The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory

Similar to The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory (20)

Recently uploaded

Recently uploaded (20)

The Heckscher-Ohlin theory of international trade/ Modern International Trade Theory