Developed by Two Swedish Economists

INTRODUCTION

§ Developed by two Swedish economists, Eli Heckscher and Bertil Ohlin between 1919-24. It is also called the “factor- proportion model”.

§ In the model resource differences are the only source of trade and shows that comparative advantage is influenced by two basic characteristics of countries and products:

1. Countries differ from each other according to the factors of production they possess (relative factor abundance).

2. Goods differ from each other according to the factors that are required in their production (relative factor intensity).

§ Basic idea:

‘A country would have a comparative advantage in the production of the good that requires a relatively large amount of a factor of production in which the country is relatively well endowed’.

§ Some important relations in the H-O model:

- linking good prices and factor returns (Stolper- Samuelson theorem)

- linking endowments and outputs (Rybczynski theorem).

§ The model has interesting implications on the effect of trade on income distribution across/between countries (factor price equalisation), and also provides an explanation for political behaviour of various interest groups in the economy.

The Model Assumptions

1. Two countries, two goods (food) and (cloth), two factors of production, capital (K) and labour (L).

2. Each country is endowed with a fixed supply of each factor of production.

3. In each country, both factors of production are fully employed.

4. Both labour and capital are perfectly mobile within