Heckscher-Ohlin Model

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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.

BREAKING DOWN '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.

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RELATED FAQS
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    Several decades after its introduction, the Heckscher-Ohlin Model of international trade remains largely theoretical, since ... Read Full Answer >>
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