The Heckscher Ohlin model

Heckscher-Ohlin ( H/O ) theory is besides known as factor-endowment theory. . It is a basic theoretical account of trade and production. It emphasises the differences in factor gift between states are the footing for international trade. The Heckscher-Ohlin theoretical account assumes two production factors and an internationally unvarying production for each of two industries. Country will export the trade good that use comparative intensively its comparatively abundant factor of production

Heckscher-Ohlin is given by Elis Heckscher and Bertil Ohlin. Elis Heckscher was a Swedish economic historiographer developed the modern theory of international trade in 1919. And Heckscher ‘s pupil Bertil Ohlin has more clear and overall account of the theory. However, he published a book ‘International and Inter-regional ‘ in 1933. He disagreed the comparative cost of international trade. ( Jains, 2009 ) The comparative cost theory states the difference of comparative cost so the international trade happens. This theory did non explicate the ground of finally determines comparative advantage. Harmonizing to David Ricardo, the cause of comparative labor productiveness, therefore comparative labor cost and comparative merchandise monetary value differed in the two states before trade. ( Carbaugh, 2008 ) . On the other manus, H-O theory is better than comparative advantage to explicate ascertained trade form and the effects of political groups on trade. It besides shows the impact of economic growing on trade.

Heckscher-Ohlin theory is consists of four cardinal propositions. First, the Heckscher-Ohlin Theorem itself ; each state will export the good which use its abundant factor intensively nad will import the good which its scarce factor intensively. Second, the Factor Price Equalization Theorem suggests the free trade in end products that specialise in labor-intensive production and export the capital-intensive goods. Third, Stolper-Samuelson Theorem provinces that when the postive how alterations in goods monetary values when alterations in factor monetary values. The monetary value of the abundant will increase more than the addition in the monetary value of the goods which use the abundant factor intensively. As a consequence, it will increase the rewards in the labour abundant state. Forthly, Rybczynski Theorem defined the addition in the factor of production can take to a shortening in the production of the trade good utilizing that factor intensively and an absolute enlargement of the trade good utilizing comparatively small of the same factor. ( Fisher,2010 )

Harmonizing to Heckscher-Ohlin theory, a state has comparative advantages in those trade goods that use its abundant factor intensively. Hence, each state will export the merchandise which uses its abundant factor intensively and will import the merchandise which uses its scarce factor intensively. For that grounds, the labour-abundant states export labour intensive goods and capital-abundant states export capital intensive goods. For illustration, China exports plaything and apparels. It has comparatively low labor costs. On the other manus, Germany exports autos. The productions of autos need heavy building equipment and industrial machinery. This is why this theory is besides called factor proportions analysis. In conformity with H-O theory, we assume a state ‘s capital-labour ratio is K/L. For illustration, we concern the trade between China and US. China has 10 machines and 20 workers. The US has 80 machines and 240 workers. Therefore, Kc/Lc=1/2 and Kus/Lus =1/3. In this illustration, China is considered as labour abundant state. We suppose K and L have monetary value denoted as rent ( R ) and Wages ( W ) . If ( W/R ) us is the Wage/Rent in US and ( W/R ) degree Celsius in China. When ( W/R ) us & lt ; ( W/R ) degree Celsius, China is considered as labour abundant and US is considered as capital abundant state. The definition of factor strength concerns the sum of labor and capital required to bring forth a good as follows: We suppose two goods ( A and B ) have two factor of production ( K and L ) . Then, we suppose ( K/L ) A means the capital/Labour ratio require to merchandise one unit of good A ; ( K/L ) B means the capital/Labour ratio require to merchandise one unit of good B. When ( K/L ) A & gt ; ( K/L ) B, good Angstrom is capital intensive and good B is labour intensive. ( Clarke and Kulkarni )

H-O Model is two-factor and two-commodity and two-country theoretical account. . The footing of trade is the comparative cost derived functions of trade goods as between states. These cost differences are the same thing as monetary value differences in the classical theroy, as monetary value is equal the fringy cost of the trade good. H-O Model explained these monetary value differences are ensuing from differences in factor endowmnet between different states. Consequently, differences in factor gift explain international trade. ( Cheriunilam, 2006 ) . For that ground, H-O Model is besides called factor proportions analysis. Country specialise capital-intensive goods which will be produced at comparatively lower cost and monetary values. The illustration of capital intensive good includes fabric, places and rugs.

In the recent old ages, China is a important exportable state due to the labour intensive merchandises. The merchandises mostly consisted of playthings, vesture and footwear. Indeed, China is the universe ‘s largest exporter. China ‘s General Administration of Customs ( GAC ) said that the foreign export reach $ 130.7bn, lift 17.7 % on December in 2010. 2010 World Factbook showed that the population of China is the most in the universe. There are 72.1 % of population are 15-64 old ages. The inexpensive labors, low cost and currency policy better the production so China is a labour abundant state. Harmonizing to H-O theory, the responsibly of international trade that bring the equality in the factor monetary value of the states concerned. The pay rate in China is low so they can specialize the labour intensive goods. On the other manus, the involvement rate in Japan is low so they can specialize the capital intensive goods. Therefore, China export labour intensive goods to Japan and Japan will export capital intensive goods to China. China will export more labour intensive good, so the demand of labors will increase and the pay rate will besides lift. But, China will import more capital intensive good, so the demand of capital lessening, the monetary value of capital will besides drop. Likewise, the monetary value of capital will increase and the pay of labor will diminish in Japan. The addition in pay in China will go equal to diminish the rewards in Japan. Therefore, the monetary value of the factors will go equal in China and Japan because of international trade. ( Jain and Sen, 2008 )

There are two ways to turn out the H-O theory that the different factor endowment lead to different dealing curves. The first scheme produces the factor proportion version of H-O theory. Therefore, we can turn out that the different factor of production monetary values lead to different monetary value of goods. The 2nd scheme is the trade eliminates difference in factor of the monetary value.

The theoretical account of Heckscher-Ohlin is based on a figure of expressed and inexplicit premise. The of import premise of the theoretical account are as the followers: First of wholly, this theory is related to two states ( H and F ) , two goods ( A and B ) and two factors ( K and L ) . Hence, it is called 2x2x2 theoretical account. ( Jains, 2009 ) This expression besides called the Heckscher-Ohlin-Samuelson ( HOS ) theoretical account because Paul Samuelson who develped mathematical theoretical account from the H-O theoretical account. Furthermore, there is no producitivity differences because all the states use the same engineering to bring forth good A and good B. For that grounds, both states will give same measure and quality of end product. Furthermore, the penchants of all consumers are indistinguishable such as gustatory sensations of consumers and expections of future monetary values. Besides, in the procedure of production and ingestion, there are merely two goods are of import such as nutrient and fabric. Harmonizing to a production fuction having changeless return to graduated table and decreasing fringy product. , nutrient and fabric are used to unite with labor and land. Additionally, there is perfect compective in all market, as no purchaser or marketer of a trade good has the power to impact the monetary value of the trade good by itself. The monetary values of the trade goods are equal to their fringy productiveness because the market for a trade good is besides perfect competitory. So, there are many purchasers and Sellerss. But, the figure of providers are fixed in each state and all resources are to the full employed. The factor gift are different between two states. Simultaneously, all Sellerss sell same goods. The end of single bargain merchandises is to maximise happines wheras the ends of house sell merchandises is to maximise net income. Although the perfect factor mobility within each state, international factor stationariness. There is free trade exists between two states due to no distribution on the market and dealing cost. ( Jain et al, 2008 ) In additonal, the land-intensive is the production of nutrient. In contrast, the labor-intensive is the production of fabric. As a consequence, the figure of worker is ever higher in cloth production than in nutrient production. What ‘s more, factor strength differs between goods. That is, some goods are capital intesnive and some goods are labour intensive. It means that labour intensive require comparatively more capital for the production and labour intensive require comparatively more labors for their production.

However, Wassily W. Leontief attempted to through empirical observation prove Te cogency of the H-O Model in 1953 with the United States trade form. Then, Bowen, Leamer and Sveikauskas tested the H-O theoretical account on planetary information to corroborate the Leontief Paradox. The Tests on fabricating informations between low or in-between income states and high income states besides support this theoretical account. Leontief ( 1951 ) builted an input-output theoretical account for 200 US industries for 1947. He assumed US was K-abundant state and he used US exports and import replacements. The information took into history merely two factors including labor and capital. It found that US exports tend to more labor-intensive than US imports as US imports are comparatively more capital-intensive than US exports. It proved the factor-proportion theory. ( Cheriunilam, 2006 ) The Leontief Paradox pointed out that US workers are more productive than foreign workers.

After that, Leamer ( 1980 ) used a multifactor version of H-O Model to reason the trade forms and factor were related to each other. Leamer ( 1984 ) recognised the function of comparative factor gift in accounting for trading forms in a multi-country, multi-factor model. In short, he found that the net export of natural resources such as crude oil and natural stuffs are positively related to supplies of such natural resources such as coal and oil. Equally good as, the net export of assorted crop is positively related to land gifts and manufactured goods are positively related to capital and labour gifts. Leaner ( 1984 ) concluded that ‘the chief current of international trade are good understood in footings of the copiousness of a unusually limited list of resources. In that sense the Heckscher-Ohlin theory comes out looking instead good ‘ .

Afterwards, Maskus ( 1985 ) , Bowen, Leamer and Sveikauskas ( BLS ) ( 1987 ) tried to prove the links between gifts and strengths to merchandise form. Their surveies used planetary informations to happen contradictory consequence. , BLS ( 1987 ) defined the relationship of three variables including trade, factor gifts and factor input demands in this survey “ the first systematic and complete rating of the relationships implied by the H-O-V Hypothesis among these three sets of variables. ” These surveies examined 12 factors of production for 27 states, and under the status of technological differences to spread out the H-O Model. The survey found that for two-thirds of the factors of production, trade happened in the way expected by the H-O Theorem less than 70 per centum of the clip.

Trefler ( 1993 ) investigated 33 states and 9 inputs ; he found that hapless states tend to be abundant in most factors which rich states tend to be scarce in most factors. It called Endowments Paradox. Rich states ever have trade excesss. Trefler explained this survey more clearly in 1995. He was the first economic expert to see a non-factor monetary value equalization version of H-O theoretical account. The three chief premise of factor monetary value equalization theorem: all states have the same engineering, all states produce all goods and there are no trade costs. Trefler ( 1995 ) indicated the different of cross-country in engineering and found that the theoretical account preformed much better. John Romalis ( 2004 ) loosed the 3rd premise of factor equalization theorem and allowed for dearly-won international trade. His survey pointed out that states use their abundant factor intensively to export disproportional sum in industries.

Harrigan ( 1995,1997 ) explained the production of the H-O theoretical account is most closely. Harrigan ( 1997 ) examined the part of TFP and factor copiousness in finding specialization in a series of reduced from industry-level surveies. He does non analyze the conditions under which the skip of Ricardian engineering introduces systematic prejudices in the trial of H-O theoretical account. This paper contributes to the literature by presenting a status under which disregarding one factor for comparative advantage will or will non bias empirical trial of the other and finds that this status keep through empirical observation in the information set examined. ( Morrow, 2008 )

However, H-O theoretical account can non to the full explicate the international trade. It is a inactive theory. It merely shows the place of factor in a state at any given point of clip. But it does non demo how the economic system will turn with a alteration in production status. First of all, H-O theory is unrealistic premise such as 2x2x2 theoretical account. Leontief ( 1953 ) challenged H-O theory. The finding of trade refers to comparative copiousness of factors of production in each state. Haberler criticise that H-O theory is failed to develop comprehensive general equilibrium. It is simply a partial equilibrium analysis. The factors of production are non homogenous in all states as the premise of H-O theory is that the factors of production are homogenous in merchandising states such as production engineerings. Wijnholds judged the H-O theory is failed to recognize factor to impact the monetary value of concluding good. The fringy public-service corporation decides the monetary value of goods. Besides, the difference in factor gift is non merely ground of international trade. But, H-O theory ignore other grounds of international trade exists such as difference in the quality of factors. So, H-O theory explains the international trade dimly. In fact, the penchant of consumers to the merchandise can non be indistinguishable while the penchants of consumers are equal in H-O theory. In conclude, H-O theory is of import theory to the international trade. ( Jain et al, 2008 )