Heckscher Ohlin's H-O Theory

. The Heckscher Ohlin theorem states that countries which are rich in labor will export labor intensive goods and countries which are rich in capital will export capital intensive goods.

Assumptions of Heckscher Ohlin's HO Theory

two countries involved. Each country has two factors (labor and capital). Each country produce two commodities (labor intensive and capital intensive) production function is subject to constant returns to scale.

 Factors are freely mobile within a country but immobile between countries. countries differ in factor supply Each commodity differs in factor intensity. The production function remains the same in different countries for the same commodity. Trade is free .

concept of Factor Abundance

In the two countries, two commodities & two factor model, implies that the capital rich country will export capital intensive commodity and the labor rich country will export labor intensive commodity

Price Criterion for defining Factor Abundance

A country where capital is relatively cheaper and labor is relatively costly is said to be capital rich country. Whereas a country where labor is relatively cheaper and capital is relatively costly is said to be labor rich country. Price of the factor can be symbolically measured as follows :-

Diagram Explaining Heckscher Ohlin's H-O Theory

Conclusion of H-O theory

The basis of internal trade is the difference in commodity prices in the two countries. Differences in the commodity prices are due to cost differences which are the results of differences in factor endowments in two countries A capital rich country specializes in capital intensive goods & exports them. While a Labor abundant country specializes in labor intensive goods & exports them.

Limitations of Heckscher Ohlin's H-O Theory

Unrealistic Assumptions Restrictive One-Sided Theory Consumers' Demand ignored Leontief Paradox