What is the 'Heckscher-Ohlin Model'

The Heckscher-Ohlin model is a theory in economics explaining that countries export what can be most efficiently and plentifully produced. This model is used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties. Emphasis is placed on the exportation of goods requiring factors of production that a country has in abundance and the importation of goods that the country cannot produce as effectively.

BREAKING DOWN 'Heckscher-Ohlin Model'

At its center, the Heckscher-Ohlin model’s goal is to mathematically explain the means by which a country should operate when resources are imbalanced throughout the world, meaning resources a country lacks are abundant elsewhere, with different countries having different resources in abundance to feed into the global market.

Example

For example, certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other countries can easily access and store precious metals but have little in the way of agriculture. The Heckscher-Ohlin model is not limited to commodities that can be traded but incorporates other production factors, including labor. The costs of labor vary from one country to another, so countries that have cheap labor forces, according to the model, should focus primarily on producing goods that are too labor-intensive for other countries to focus on.

The model places emphasis on the benefits of international trade, more specifically, the global benefits to all when each country puts the most effort into exporting resources that are natively abundant. The benefit comes full circle when each country imports the resources it naturally lacks. Because a country does not have to rely solely on internal markets, it can take advantage of the more elastic demand. Considering the example of labor, as more and more countries and emerging markets develop, and thus the cost of labor goes up, marginal productivity declines. Trading internationally allows countries to adjust to capital-intensive good production, an action that would not be possible if the country only sold internally.

Evidence

While the Heckscher-Ohlin model rings logical, and fairly reasonable, most economists have difficulty tracking evidence that actually supports the model. The truth is that a variety of other models have been used in an attempt to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets. This theory is outlined and explained by the Linder hypothesis.

History

The primary work behind the theory was presented in a 1919 Swedish paper written by Eli Heckscher and was later bolstered by his student, Bertil Ohlin, in his 1933 book. A number of years later, economist Paul Samuelson expanded the original model — largely through articles written in 1949 and 1953. This is why the model is often referred to as the Heckscher-Ohlin-Samuelson model.

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