Heckscher-Ohlin theory
Also called: Heckscher-Ohlin model, H-O model, Factor endowment theory · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
The Heckscher-Ohlin theory (1919/1933) says a country exports goods that use a lot of its abundant factor of production and imports goods that use a lot of its scarce factor. Factors of production are inputs such as labour, capital and land. Under this theory, trade arises from differences in factor endowments, meaning how much of each factor a country has.
Example
India has plenty of labour. So it exports labour-intensive goods such as garments, leather, gems and services. Capital-intensive goods tend to be imported.
Don't confuse with
- Ricardian comparative advantage: this explains trade by differences in labour productivity, measured through opportunity cost. Heckscher-Ohlin explains it by differences in factor endowments.
- Leontief paradox: this is not a version of the theory. It is an empirical finding from US data that went against the theory.
Related concepts
- Absolute advantage
- Comparative advantage
- Gains from trade
- Autarky
- Stolper-Samuelson theorem
- Leontief paradox
- Intra-industry trade
- New trade theory
- Gravity model of trade
- Entrepot trade