Heckscher-Ohlin Model

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 and natural resources. Emphasis is placed on the exportation of goods requiring factors of production that a country has in abundance and the importation of goods that a nation cannot produce as effectively.

BREAKING DOWN 'Heckscher-Ohlin Model'

The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. 

Examples of the Heckscher-Ohlin Model

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 such as labor. The costs of labor vary from one country to another, so countries that have a cheap labor force, according to the model, should focus primarily on producing goods that are labor-intensive.

The model emphazes the benefits of international trade, more specifically, the global benefits to all when each country puts the most effort into exporting resources that are domestically naturally abundant. Each country benefits 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 elastic demand. Considering the example of labor, as more countries and emerging markets develop, the cost of labor increases and marginal productivity declines. Trading internationally allows countries to adjust to capital-intensive goods production, which would not be possible if the country only sold goods internally.

Evidence of the Heckscher-Ohlin Model

While the Heckscher-Ohlin model appears reasonable, most economists have difficulty finding evidence to support the model. A variety of other models have been used 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 of the Heckscher-Ohlin Model

The primary work behind the Heckscher-Ohlin model was presented in a 1919 Swedish paper written by Eli Heckscher and was later bolstered by his student, Bertil Ohlin, in 1933. Some 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.