Heckscher-Ohlin model

The Heckscher-Ohlin model (H-O model) is a General equilibrium mathematical model of the macroeconomy in international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting the patterns of trade in the types of good that particular countries will specialize in exporting.

Conclusions of the model

The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:

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Heckscher-Ohlin theorem

The exports of a capital-abundant country will be from Capital intensive industries, and labour-abundant countries will import such goods, exporting labour intensive goods in return. Competitive pressures within the H-O model produce this prediction fairly straightforwardly. Conveniently, this is an easily testable hypothesis.

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Rybczynski theorem

Any change in relative factor endowment causes a corresponding change in the industrial mix between capital-intensive and labour-intensive production. (This is the dynamic equivalent to the Heckscher-Ohlin theorem.)

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Stolper-Samuelson theorem

Relative changes in output goods prices will drive the relative prices of the factors used to produce them. If the world price of capital-intensive goods increases relative to the price of labour intensive goods the rental rate will increase relative to the wage rate (the return on capital as against the return to labour).

Related Topics:
Rental - Wage

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Factor-Price Equalization theorem

Free and competitive trade will make factor prices converge along with traded goods prices. The FPE theorem is the most significant conclusion of the HO-model, but it is also the theorem which has found the least agreement with the economic evidence. Neither the rental return to capital, nor the wage rates seem to consistently converge between trading partners at different levels of development.

Related Topics:
Competitive - Rent - Wage

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The implications of factor-proportion changes

The Stolper-Samuelson theorem concerns nominal rents and wages. The Magnification effect on prices considers the effect of output-goods price-changes on the real return to capital and labour. This is done by dividing the nominal rates with a price index, but took thirty years to develop completely because of the theoretical complexity involved.

Related Topics:
Nominal - Real - Price index

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• The Magnification effect shows that trade liberalization will actually make the locally-scarce factor of production worse off (because increased trade makes the price index fall by less than the drop in returns to the scarce-factor induced by the Stolper-Samuelson theorem).
• The Magnification effect on production quantity-shifts induced by endowment changes (via the Rybczynski theorem) predicts a larger proportionate shift in output-quantity than in the corresponding endowment factor shift which induced it. This has implications to both labour and capital:
• Assuming fixed capital, population growth will dilute the scarcity of labour in relation to capital. If the population growth outpaces the growth in capital by 10% this may translate into a 20% shift in the balance of employment to the labour-intensive industries.
• In the modern world, money tends to be much more mobile than labour, so import of capital to a country will almost certainly shift the relative factor-abundances in favour of capital. The magnification effect says that a 10% increase in national capital may lead to a redistribution of labour amounting to a fifth of the entire economy (towards capital-intensive, high-tech production). Notably, employment patterns in very poor countries can be dramatically affected by a small amount of FDI, in this model. (See also: Dutch disease.)