Heckscher-Ohlin Model

The Heckscher–Ohlin model (H–O model) is a neoclassical economic theory of international trade, developed by Eli Heckscher (1919) and Bertil Ohlin (1933). It states that a country exports goods that make intensive use of its abundant factors of production and imports goods that make intensive use of its scarce factors of production.

The H–O model is based on the following assumptions:

* There are two countries, two goods, and two factors of production (labour and capital).
* The countries are identical in all respects except for their factor endowments.
* The factors of production are perfectly mobile within each country but perfectly immobile between countries.
* There are no transportation costs or other barriers to trade.
* The goods are produced under constant returns to scale.

The H–O model predicts that the country with a relatively abundant supply of labour will export labour-intensive goods and import capital-intensive goods. The country with a relatively abundant supply of capital will export capital-intensive goods and import labour-intensive goods.

The H–O model has been used to explain a number of patterns of international trade, such as the trade between developed and developing countries. Developed countries tend to export capital-intensive goods and import labour-intensive goods. Developing countries tend to export labour-intensive goods and import capital-intensive goods.

The H–O model has also been used to explain the effects of trade liberalization. Trade liberalization is expected to increase the volume of trade and to reallocate resources from the production of import-competing goods to the production of export goods. The H–O model predicts that trade liberalization will benefit the country with a relatively abundant supply of the factors used in the production of export goods.

The H–O model has been criticized on a number of grounds. One criticism is that the model assumes that factors of production are perfectly mobile within each country but perfectly immobile between countries. This assumption is unrealistic, as factors of production can often move between countries, albeit with some difficulty.

Another criticism is that the model assumes that there are no transportation costs or other barriers to trade. This assumption is also unrealistic, as transportation costs and other barriers to trade can often be significant.

Finally, the model assumes that the goods are produced under constant returns to scale. This assumption is also unrealistic, as many goods are produced under increasing or decreasing returns to scale.

Despite these criticisms, the H–O model remains a valuable tool for understanding the patterns of international trade. The model provides a simple and intuitive explanation for why countries trade with each other and how trade liberalization can affect the economy.