Heckscher–Ohlin theorem

The Heckscher- Ohlin theorem ( after the Swedish economic historian Eli Heckscher (1919) and the Swedish economist Bertil Ohlin factor proportions theory also called ) is a theory to explain the pattern of specialization in international trade. It builds on David Ricardo's theory of comparative advantage.

It states that - are economies with relatively large amount of capital specialize in the production of capital-intensive goods, whereas countries with relatively many workers will specialize in the production of labor-intensive goods - going from a different relative features of economies with capital and labor from. Therefore, a country exports those goods in whose production the relatively abundant factor used relatively intensively. Even if all economies were equipped with the same technical conditions, a specialization in certain products would therefore be useful.

• 3.1 Both countries have the same production principle
• 3.2 Production must have constant returns to scale
• 3.3 The methods of production of both goods differ
• 3.4 labor and capital flexibility within countries
• 3.5 Capital and Arbeitsunbeweglichkeit between countries
• 3.6 goods have the same price everywhere
• 3.7 Perfect international competition

Properties of the model

Relative Features of the factors of production ( land, raw materials, labor and capital ) determine the comparative advantage of any country. Countries have comparative advantages in goods, for which the necessary factors of production at the site are abundant. These goods are cheaper to produce than the goods whose production factors at the site are scarce.

Theoretical development of the model

First release

The model is classically attributed to Bertil Ohlin's 1933 treatise published Interregional and International Trade. Nevertheless Ohlin laid back in 1924, as presented in Swedish only, and less -received dissertation action Teori ( " trade theory " ) the basis of the model before. Some elements of this theory were already founded by Eli Heckscher in his article The Effect of Foreign Trade on the Distribution of Income in 1919; Ohlin resorted to this work for his doctoral dissertation.

The 2 × 2 × 2 model

The original HO model assumed that the only difference between countries is the amount of labor and capital. It included two countries that produce two goods. Since two production factors must be present, this model is sometimes called 2 × 2 × 2 model.

The model has variable factor ratios between countries: high developed countries have a relatively high proportion of capital to labor in contrast to developing countries. Furthermore, the country has a highly developed capital surplus with the developing country, adduced in accordance with a high labor income.

With this single difference Ohlin was able to explain the new mechanism of the benefit by adopting and two ways to produce these two products. One is a capital-intensive production, the other a labor-intensive production.

Extensions

The model has been extended by many economists since the 30s. These developments did not change the fundamental role of variable factor proportions in international trade, but it added to the model different real aspects (eg customs agreement ) was added in the hope to increase the predictive power of the model or to make it a mathematical means, examined with the macroeconomic problems can be.

Important contributions were made by Paul A. Samuelson, Roland Jones and Jaroslav Vanek, so these variations are sometimes referred to as the Heckscher- Ohlin - Samuelson model or the Heckscher - Ohlin - Vanek model.

Assumptions of the model

Both countries have the same production principle

The HO model differs from Ricardo in the assumption that the production function is the same in every country. The production function simply compares labor and capital.

This assumption means that the same amount of goods can be produced on capital and labor in the two countries with the same amount. Of course, it would be nonsensical same amount ( labor and capital ) to assume ( because of the relative availability of both inputs), but in principle it would go. In other words, the per capita productivity in both countries is the same size if they use the same principle of production and have the same amount of capital.

Countries have inherent advantages in the production of certain goods over others, so this is an unrealistic simplification that was made to highlight the effect of variable factors. This means that the HO model provides a contrary declaration of free trade to Ricardo. In reality, both factors can occur ( differences in technology and factor endowments ). In addition to the natural advantages in the production of a good is the infrastructure, education, culture and know- how between countries differ dramatically, so the idea of same conditions, a purely theoretical point of reference. Ohlin said that the model is long term, and that the production conditions are the same everywhere in the long term.

Production must have constant returns to scale

Both countries have simplified HO model with two goods and constant returns to scale production methods. These conditions must be met in order to create a mathematical balance. With increasing returns to scale, it would probably be more efficient for countries to specialize, but specialization is not possible with the assumptions of the HO model.

The production methods of the two goods differ

The production functions of the economies of scale must be different, so that trade is worth in this model. For example, the input parameters must change if it is a Cobb- Douglas function with positive but diminishing marginal productivity of factors of production.

With

• A: Output in agriculture,
• F: Output in the production of fish
• K: capital
• L: labor.

In this example, the marginal profitability in the fishing industry in the event of increased capital is higher. Suppose fish industry and agriculture have the same output value. The country with the higher capital can therefore develop its fishing fleet good means of capital, but it has to invest a lot of capital to improve farming. On the other hand, the agriculture in the labor rich country can be efficiently greatly improved by the use of more workers.

The cost level C is therefore: C = L * L r * K Production costs consist of the amount of work multiplied by the labor cost and the capital cost multiplied by the interest rate, which in this case is the capital remuneration. The assumption of perfect market requires that the interest rate of capital remuneration and thus corresponds to the opportunity cost of investment.

Labor and capital flexibility within countries

Within a country, capital and labor can be reallocated to achieve different outputs. As in comparative advantage argument Ricardo is believed that this can be done at no additional cost.

If the two production technologies of agriculture and the fishing industry, then it is assumed that farmers can work as a fisherman and vice versa without extra charges.

Furthermore, it is assumed that capital can simply be broken down into any technology, so that the industrial mix between production types can be changed without retooling costs. For example, it is assumed in farming and fishing that farms are sold and so boats can be built without this money is lost.

Capital and Arbeitsunbeweglichkeit between countries

The basic HO model based on the fact that the relative availability of capital and labor are internationally different, but if money can be invested freely everywhere, the competition is ( the investment) offset the amount of capital around the world. Mainly free trade would mean in investments worldwide investment pool.

As with the capital, movements in working in the world of the HO model are not allowed, because that would mean an adjustment of the relative amount of two factors of production, as in the case of immobility of capital above. This condition is more likely to be represented in the description of the modern world than the assumption that capital is limited to a single country.

Goods have the same price everywhere

The original 2 × 2 × 2 model had no restrictions on trade, tariffs and no market control ( capital was immobile, but the repatriation of foreign sales was free ). Goods were also free of transport costs between countries or other savings, which allows local procurement of a good.

If two countries have different currencies, this will affect the model in any way. Because there are no transaction costs or currency-related losses, goods abroad are offered at the same price as at home.

In Ohlins time that was a pretty simplification, but economic changes and econometric experience since the 50s showed that local prices of goods with the income related ( although the less true for traded goods ).

Perfect international competition

Neither labor nor capital have to influence the force factor prices or rates with limited provision; there exists a state of perfect competition.

Empirical review and critique

In an empirical examination of the factor proportions theory for the USA provided Wassily Leontief in 1953 found that the United States, contrary to this prediction exported mainly labor-intensive and capital-intensive goods imported (so-called Leontief paradox).

A solution to this paradox was Leontief, by distinguishing different qualities of labor and capital, the U.S. exported goods for the production one needs well-qualified workforce, while the imported goods required a great while, but not very technically demanding capital stock. This led to the formulation of the neo- factor proportions theory.

An extension of the idea represents the Faktorpreisausgleichstheorem or Stolper-Samuelson theorem dar. Furthermore Stuffan B. Linder tried to repair with the Linder hypothesis weaknesses of the Heckscher -Ohlin model.

Generally, however, empirical studies suggest that this theorem trade between developed and developing countries, far better mapping, as trade between industrialized countries which usually differ in terms of their factor prices to a lesser extent.