Hechsher-Olin Model

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The Hechsher-Olin Model demonstrates that a country will have a comparative advantage in the good that uses the factor with which it is heavily endowed.

This theorem makes two key assumptions. The first is that each country will differ in the factors of production it has available. One country may have a large and relatively uneducated population with an abundant amount of labor, and perhaps less land and capital (machines and buildings). Another country may be technologically advanced and have high capital but relatively lower availability of land or labor. The second assumption that the theorem holds is that preferences for one good over another across countries are similar. Therefore, relative costs of production (rather than relative demand for goods) dictate how much of a good is produced and consumed prior to specialization and trade.

Given these assumptions, Heckscher and Ohlin reached the conclusion that countries will have a comparative advantage in goods that are produced with the factor of production (land, labor or capital) that the country has an abundance of. This will logically lead to higher exports of those goods. This theorem differs from the Ricardian and Neoclassical models of trade because it addresses the question of why countries have comparative advantages in particular commodities instead of simply explaining how specialization and trade are beneficial. It is also apt to briefly note that the Neoclassical model differs from the Ricardian in that the latter holds that increasing opportunity costs will lead to partial specialization whereas the former assumes complete specialization of production.

A common example of the Heckscher-Ohlin Model is in the production of computers and shoes by the United States and Brazil. Since the US has abundant capital, the cost of capital will likely be lower than wages or rents, and since the production of computers is capital-intensive, the US will focus production on computers. Brazil has a relative amplitude of labor and will therefore produce mainly shoes. Both countries have the best chances of increasing overall consumption of both computers and shoes if they specialize in the good that is the cheapest to produce and import the other good. Grieco, Joseph M., and G. John Ikenberry. State Power and World Markets: The International Political Economy. Chapter 2 - The Economics of International Trade. New York: W.W. Norton & Co., 2003.