The Heckscher Ohlin Model of International Trade

Summary

The Heckscher-Ohlin model, named after economists Eli Heckscher and Bertil Ohlin, predicts trade patterns based on a country's factor endowments of capital and labor. It posits that countries will export goods intensive in their abundant factor and import goods intensive in their scarce factor. For instance, a capital-abundant country will export capital-intensive goods and import labor-intensive ones, while a labor-abundant country will do the opposite. This model illustrates the relationship between resource availability and trade dynamics, emphasizing how countries leverage their unique production capabilities in the global market.

Takeaways

• 📈 The Heckscher-Ohlin model predicts trade patterns based on a country's factor endowments.
• 🌍 Named after Swedish economists Eli Heckscher and Bertil Ohlin, the model emphasizes resource distribution.
• 💼 A country's trade pattern consists of its exports and imports, influenced by its factor endowment of labor and capital.
• 🔑 Countries export goods that are intensive in their relatively abundant factors and import goods that are intensive in their relatively scarce factors.
• ⚖️ Relative abundance is determined by comparing the capital-labor ratio between countries, not just absolute levels of capital or labor.
• 👷‍♂️ If one country is capital abundant, the other country is automatically labor abundant in this model.
• 📊 Goods are categorized as capital-intensive or labor-intensive based on their production requirements.
• 🚢 Capital-abundant countries will export capital-intensive goods and import labor-intensive goods.
• 📦 Conversely, labor-abundant countries will export labor-intensive goods and import capital-intensive goods.
• 🔄 The model highlights the reciprocal nature of trade, where each country's export reflects its resource abundance.

Q & A

What is the Heckscher-Ohlin model?

The Heckscher-Ohlin model predicts a country's pattern of trade based on its endowment of factors of production, specifically labor and capital.

Who are the economists after whom the Heckscher-Ohlin model is named?

The model is named after Swedish economists Eli Heckscher and Bertil Ohlin.

What does the term 'endowment of factors of production' refer to?

It refers to the types and proportions of factors of production, such as labor and capital, that a country possesses.

How does the Heckscher-Ohlin model determine a country's exports and imports?

The model suggests that a country will export goods that are intensive in its relatively abundant factor and will import goods that are intensive in its relatively scarce factor.

What is meant by 'relatively abundant factor' in the context of the Heckscher-Ohlin model?

A relatively abundant factor is the one that is available in greater proportion compared to other factors in a country, such as more capital per worker in a capital-abundant country.

Can you explain the capital-labor ratio in the Heckscher-Ohlin model?

The capital-labor ratio compares the total amount of capital to the total amount of labor in a country, indicating how much capital is available per worker.

How does the model differentiate between goods based on their production factors?

Goods are classified as capital-intensive or labor-intensive based on the amount of capital and labor used in their production, influencing which goods a country exports or imports.

According to the model, which type of good will a capital-abundant country export?

A capital-abundant country will export capital-intensive goods because these align with its abundant factor of production.

What does it mean when a country is referred to as 'labor-abundant'?

A labor-abundant country has a higher availability of labor compared to capital, making labor the relatively abundant factor in that country.

How does the Heckscher-Ohlin model illustrate the relationship between countries' resource endowments and trade?

The model demonstrates that countries will specialize in and trade goods that utilize their abundant factors, leading to distinct patterns of trade based on their resource endowments.