Heckscher-Ohlin Model

Definition of 'Heckscher-Ohlin Model'


An economic theory that states that countries export what they can most easily and abundantly produce. The Heckscher-Ohlin model is used to evaluate international trade, specifically trade equilibriums between countries that may have different features. The model emphasizes how countries with comparative advantages should export goods that require factors of production that they have in abundance, while importing goods that it cannot produce as efficiently.

The model was developed by two economists, Bertil Ohlin and Eli Heckscher.

Investopedia explains 'Heckscher-Ohlin Model'


At heart, the Heckscher-Ohlin model seeks to mathematically explain how countries should operate when resources are not distributed equally around the world. For example, some countries have ample oil reserves but little iron ore, while other countries have access to precious metals but not agriculture. The model goes beyond tradable commodities by also including other factors of production, such as labor. Because global labor costs vary, countries with cheap labor should focus on goods that are too labor-intensive in other countries.

The model emphasizes how countries can benefit from international trade by exporting what they have in abundance. By not having to rely solely on internal markets, countries are able to take advantage of more elastic demand. As countries develop and labor costs increase, their marginal productivity declines. By trading internationally, they are able to shift to capital-intensive goods, which could not occur if they only can sell internally.

Despite sounding reasonable, economists have had difficulty finding evidence that supports the Heckscher-Ohlin model. Other models have tried to explain how industrialized countries tend to trade with each other more than they trade with developing countries, as outlined in the Linder hypothesis.



comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center