What explains trade in the Heckscher-Ohlin model?
Heckscher and Ohlin explain that international trade is due to the differences in factor-endowments (i.e. differences in supplies of all factors and not only of labour efficiency) and different factor-proportions required for different commodities.
How many factors are there in the Heckscher-Ohlin model?
two
The H-O model is a two-country, two-good, two-factor model that assumes production processes differ in their factor intensities, while countries differ in their factor abundancies.
What are the assumptions of the Heckscher-Ohlin model?
Assumptions of the Heckscher-Ohlin Model It is assumed that there are only two nations (1 and 2) with two goods for trade (X and Y) and two factors of production (capital and labour). For producing the goods, both nations use the same technology and they use uniform factors of production.
What are the advantages of Heckscher-Ohlin theory?
Heckscher–Ohlin asserts that differences in comparative advantage come from differences in factor abundance and in the factor intensity of goods. Specifically, Heckscher–Ohlin predicts that countries will produce relatively more of the goods that use their relatively abundant factors relatively intensively.
Does Heckscher-Ohlin explain actual trade pattern?
In the Heckscher-Ohlin theory, it is not the absolute amount of capital that is important; rather, it is the amount of capital per worker. Despite its plausibility, the Heckscher-Ohlin theory is frequently at variance with the actual patterns of international trade.
How does the Heckscher Ohlin theory differ from the comparative advantage theory?
Heckscher-Ohlin asserts that differences in comparative advantage come from differences in factor abundance and in the factor intensity of goods. Specifically, Heckscher-Ohlin predicts that coun- tries will produce relatively more of the goods that use their relatively abundant factors relatively intensively.
How is the Heckscher Ohlin model superior to classical theory?
The H-O model is relatively better and takes into account both supply and demand. The Classical theory ignored capital and assumed labor as the only factor of production. The classical theory hence accredits any difference in costs to the differences in labor.
What are the limitation of Heckscher Ohlin theory?
The H-O theory cannot provide a complete and satisfactory explanation of trade in such cases. In fact, the specialisation is governed not only by factor proportions but also by several other factors like cost and price differences, transport costs, economies of scale, external economies etc.
What is the Heckscher-Ohlin factor proportions theorem of international trade?
Simply stated, the theorem says that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.