Heckscher-Ohlin theorem

Heckscher-Ohlin theorem

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The Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model. It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good."

The critical assumption of the Heckscher–Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same. The relative abundance in capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 will cause the capital-abundant country to produce
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...

 the capital-intensive good cheaper than the labor-abundant country and vice versa.

Initially, when the countries are not trading:
  • the price
    Price
    -Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

     of capital-intensive good in capital-abundant country will be bid down relative to the price of the good in the other country,
  • the price of labor-intensive good in labor-abundant country will be bid down relative to the price of the good in the other country.


Once trade is allowed, profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

-seeking firms will move their products to the markets that have (temporary) higher price. As a result:
  • the capital-abundant country will export the capital-intensive good,
  • the labor-abundant country will export the labor-intensive good.


The Leontief paradox
Leontief paradox
Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital/labor ratio in exports than in imports....

, presented by Wassily Leontief
Wassily Leontief
Wassily Wassilyovich Leontief , was a Russian-American economist notable for his research on how changes in one economic sector may have an effect on other sectors. Leontief won the Nobel Committee's Nobel Memorial Prize in Economic Sciences in 1973, and three of his doctoral students have also...

 in 1951, found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in apparent contradiction with Heckscher–Ohlin theorem. However, if labor is separated into two distinct factors, skilled labor and unskilled labor, the Heckscher-Ohlin theorem is more accurate. The U.S. tends to export skill labor-intensive goods, and tends to import unskilled labor-intensive goods.

Related theorems

  • Factor price equalization
    Factor price equalization
    Factor price equalization is an economic theory, by Paul A. Samuelson , which states that the relative prices for two identical factors of production in the same market will eventually equal each other because of competition. The price for each single factor need not become equal, but relative...

     – The relative prices for two identical factors of production in the same market will eventually equal each other because of competition.
  • Stolper–Samuelson theorem – A rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor.
  • Rybczynski theorem
    Rybczynski theorem
    The Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz Rybczynski . The theorem states: At constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor...

     – When only one of two factors of production
    Factors of production
    In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...

    is increased there is a relative increase in the production of the good using more of that factor. This leads to a corresponding decline in that good's relative price as well as a decline in the production of the good that uses the other factor most intensively.