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The Heckscher-Ohlin Theory

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Christopher Herlihy

on 21 November 2012

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Transcript of The Heckscher-Ohlin Theory

What is the H.O. Trade Theory? The Heckscher-Ohlin theory says that two countries trade goods with each other and thereby achieve greater economic welfare The Heckscher-Ohlin Trade Theory Why Trade? Trade can raise incomes

Trade stimulates economic growth

A labor based economy or a capital based economy

Freer trade cuts the cost of living

Provides consumers with more choice of products and qualities Capital Intensive Industries Labor Intensive Industries Automotive Industry

Computer Industry

Mobile phone Industry

Petroleum Industry Agriculture Industry

Textile Industry

Mining Industry

Food Service Industry Production of Goods The production of goods and services requires capital and workers.

These goods are known as capital intensive and labor intensive. . Eli Heckscher (1879 - 1952) Heckscher was a Swedish economist

He is best known for writing his book
called the "Mercantilist"

Mercantilism - Accumulating precious
metals to advance a state above others
(Export in large quantities while
import in small quantities.) Bertil Ohlin (1899-1979) Heckscher's student

Developed and elaborated the
factor endowment theory.

Professor of economics and
also a major political figure in Sweden

Won Nobel prize for international trade
theory and shared it with James Meade
instead of Heckscher. Assumptions of the H.O. Trade Theory labor and capital, are not available in the
same proportion in both countries

The two goods produced require more capital or relatively more labor

Labor and capital do not move between the two countries

There are no costs associated with transporting the goods between countries Economic Gains From Trade According to the H.O. Theory, not every class (capitalists & workers) benefits from international trade and specialization International Trade
(Country X)
(-) Capital
(+)Workers (Specialization of goods) Workers wages increases (+) Capitalists income decreases (-) Bigger Differences - Greater Gains Capital and labor are not available in the same proportions in the two countries

A country with more capital, specializes in producing capital intensive goods

While the country with relatively little capital specializes in production of labor-intensive goods Country X Labor Jeans Capital Cell
Phones Country Y Labor Jeans Capital Cell
Phones Country X Labor Jeans Capital Cell
Phones Labor Jeans Capital Cell
Phones Country Y International Market Capital-To-Labor Ratio Relating International Trade Theories Comparative Advantage - Producing something at a lower cost than anyone else

Absolute Advantage - Being the best

Factor Endowment Theory - Factors of production in a country Wassily Leontief Absolute Advantage Comparative Advantage Opportunity Cost The value of what
is given up.

Opportunity cost determine comparative advantage.

Theory Disproved Tested the theory and concluded it be false

US has a lot of capital therefore...

The US exports were less capital intensive than US imports

Full transcript