Heckscher-Ohlin Theory

Heckscher-Ohlin Theory
Factor Endowment Theory Factor Price Equalization

Sources of Comparative Advantage
• Factor-Endowment (Heckscher-Ohlin) Theory
– Explains comparative advantage by differences in relative national supply conditions – Key determinant: Resource endowments – Assumptions:
• • • • Perfect competition Same demand conditions Uniform quality factor inputs Same technology used

Factor Endowments
• Relative price levels differ among nations because:
– Nations have different relative endowments of factor inputs {labor(skilled or less skilled)}, land, capital – Different commodities require factor inputs with differing intensities of production
• Wheat is land intensive • Textiles are labor intensive • Aircraft are capital intensive

Relative Factor Endowments

Capital Intensities

Factor Price Equalization
• Trade based on comparative advantage arising from factor endowments • Redirecting demand away from the scarce factor toward the abundant factor
– Cheap factor becomes more expensive; expensive factor becomes cheaper – Not fully possible in a real world situation:
• Human capital varies across countries • Technology usage not identical • Transportation costs and trade barriers

Winners and Losers

Factor Price Equalization Across Borders
• With free trade between Oregon and Washington states, the real wages of skilled workers in Washington can’t be much different than the real wages of workers in Oregon. • In the limit, the opening of free trade between France, Greece, Spain, and other EU countries will mean that real wages will be the same in all EU countries, or least similar to the variation we observe among the US states.

Trade and Income Inequality
• Theoretically, increased trade could increase inequalities in wages
– Example: US Trade increases the supply of products of industries that intensively use unskilled labor and increases the demand for products of industries that intensively use high skilled