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.

Theoretical development of the model

The Ricardian model of comparative advantage has trade ultimately motivated by differences in labour productivity using different technologies. Heckscher and Ohlin didn't require production technology to vary between countries, so (in the interests of simplicity) the H-O model has identical production technology everywhere. Ricardo considered a single factor of production (labour) and would not have been able to produce comparative advantage without technological differences between countries (all nations would become autarkies at various stages of development, with no reason to trade with each other). The H-O model removed technology variations but introduced variable capital endowments, effectively recreating the inter-country variation of labour productivity which Ricardo had imposed exogenously in a way endogenous to the model. With international variations in the capital endowment (i.e. infrastructure) and goods requiring different factor proportions, Ricardo's comparative advantage emerges as a profit-maximizing solution of capitalist's choices from within the model's equations. (The decision capital owners are faced with is between investments in differing production technologies: The H-O model assumes capital is privately held.)

Related Topics:
Comparative advantage - Factor of production - Autarkies - Exogenous - Endogenous - Infrastructure

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Original publication

Bertil Ohlin published the book which first explained the theory in 1933. Although he wrote the book alone, Heckscher was credited as co-developer of the model, because of his earlier work on the problem, and because many of the ideas in the final model came from Ohlin's doctoral thesis, supervised by Heckscher.

Related Topics:
Bertil Ohlin - 1933

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Interregional and International Trade itself was verbose, rather than being pared down to the mathematical, and appealed because of its new insights.

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The 2x2x2 model

The original H-O model assumed that the only difference between countries was the relative abundances of labour and capital. The original Heckscher-Ohlin model contained two countries, and had two commodities that could be produced. Since there are two (homogenous) factors of production this model is sometimes called the "2x2x2 model".

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The model has variable factor proportions between countries: Highly developed countries have a comparatively high ratio of capital to labour in relation to developing countries. This makes the developed country capital-abundant relative to the developing nation, and the developing nation labour-abundant in relation to the developed country.

Related Topics:
Developing countries - Capital-abundant - Labour-abundant

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With this single difference, Ohlin was able to discuss the new mechanism of comparative advantage, using just two goods and two technologies to produce them. (One technology would be a capital intensive industry, the other a labour intensive business - see "assumptions" below).

Related Topics:
Comparative advantage - Capital intensive

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Extensions

The model has been extended since the 1930s by many economists. These developments did not change the fundamental role of variable factor proportions in driving international trade, but added to the model various real-world considerations (such as tariffs) in the hopes of increasing the model's predictive power, or as a mathematical way of discussing macroeconomic policy options.

Related Topics:
1930 - Tariff - Macroeconomic

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Notable contributions came from Paul Samuelson, Ronald Jones, and Jaroslav Vanek, so that variations of the model are sometimes called the Heckscher-Ohlin-Samuelson model or the Heckscher-Ohlin-Vanek model in the modern synthesis.

Related Topics:
Paul Samuelson - Ronald Jones - Jaroslav Vanek - Modern synthesis

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