Heckscher-Ohlin Model

AAA

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.

RELATED TERMS
  1. International Commerce

    The buying and selling of goods between sovereign nations. International ...
  2. Import And Export Prices

    Two indexes that monitor the prices of imports and exports in ...
  3. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  4. Import

    A good or service brought into one country from another. Along ...
  5. Export

    A function of international trade whereby goods produced in one ...
  6. Delivered Duty Unpaid - DDU

    A transaction in international trade where the seller is responsible ...
RELATED FAQS
  1. What are the main principles of the Heckscher-Ohlin Model?

    Heckscher-Ohlin Model The Heckscher-Ohlin model is an economic model of international trade originally created by professors ... Read Full Answer >>
  2. Which nation's economies have proven the effectiveness of the Heckscher-Ohlin Model?

    Several decades after its introduction, the Heckscher-Ohlin Model of international trade remains largely theoretical, since ... Read Full Answer >>
  3. Which factors can influence a country's balance of trade?

    A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all of the factors ... Read Full Answer >>
  4. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  5. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  6. What is the difference between cost and freight (CFR) and cost, insurance and freight ...

    The difference between cost and freight (CFR) and cost, insurance and freight (CIF) is essentially the requirement under ... Read Full Answer >>
Related Articles
  1. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. Mutual Funds & ETFs

    Getting Into International Investing

    Diversifying can mean not only investing in various asset classes but also venturing beyond domestic exchanges.
  3. Forex Education

    The 3 Biggest Risks Faced By International Investors

    Investing internationally is a great way to diversify your portfolio, but you need to know the risks.
  4. Economics

    Cautionary Signs For International Investors

    "Going global" is a fashionable investing style, but investors should know the risks.
  5. Credit & Loans

    Treasury International Capital

    This important economic indicator can affect interest rates, dollar value and the bond markets.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard International Stock

    Discover how the Vanguard Total International Stock ETF is managed, and learn which investors may find it suitable as part of a diversified portfolio.
  7. Stock Analysis

    The Top Performing Airlines Right Now

    Learn about the airline industry and its top-performing companies. Understand these top-emerging airlines and why they have taken more market share.
  8. Economics

    What Is a Quota?

    In business, quota usually refers to the sales target for a salesperson or a sales team.
  9. Economics

    What Does Infrastructure Mean?

    Examples of infrastructure include mass transit, communication, sewage, water and electric systems, plus roads, bridges and tunnels.
  10. Economics

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!