Heckscher-Ohlin factor proportions theory

Heckscher-Ohlin factor proportions theory

an explanation of COMPARATIVE ADVANTAGE in INTERNATIONAL TRADE that is based on differences in factor endowments between countries.

Consider a situation in which two countries (A and B) produce two goods (X and Y).

Country A, let us assume, possesses an abundance of labour but a scarcity of capital; by contrast, country B possesses an abundance of capital but a shortage of labour. Thus, the cost of labour is low relative to capital in country A, whereas the cost of capital is low relative to labour in country B. The production of good X, let us assume, is capital-intensive; while the production of good Y is labour-intensive.

Given these differences in labour and capital intensities, the following hypothesis about the structure of trade suggests itself: country A has a comparative advantage in the production of good Y because this uses much of its relatively cheap factor (labour). It will specialize in the production of good Y, exporting Y in exchange for imports of X, the good in which it has a comparative disadvantage.

Country B has a comparative advantage in the production of good X because this uses much of its relatively cheap factor (capital). It will specialize in the production of good X, exporting X in exchange for imports of Y, the good in which it has a comparative disadvantage.

The Heckscher-Ohlin theory presents a static supply-orientated interpretation of international trade that assumes that production functions are the same in all countries. The theory takes no account of the influence of dynamic technological change on comparative advantage, nor does it consider the effect of DEMAND and PRODUCT DIFFERENTIATION on the pattern of international trade flows. See GAINS FROM TRADE, THEORY OF INTERNATIONAL TRADE.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005