What is the Heckscher-Ohlin model?

The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can produce most efficiently and abundantly. Also called the HO model or the 2x2x2 model, it makes it possible to assess exchanges and more precisely the balance of exchanges between two countries with different specialties and natural resources.

The model emphasizes the export of goods requiring production factors that a country has in abundance. It also emphasizes importing goods that a nation cannot produce as efficiently. It considers that countries should ideally export the materials and resources they have in surplus, while importing proportionally the resources they need.

Warning

Here is some important information about the Heckscher-Ohlin model.

  • The Heckscher-Ohlin model assesses the trade balance between two countries that have different specialties and natural resources.
  • The model explains how a nation should function and trade when resources are out of balance across the world.
  • The model is not limited to raw materials, but also incorporates other factors of production such as labor.

The basics of the Heckscher-Ohlin model

The main work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson expanded on the original model through papers written in 1949 and 1953. Some call it the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should function and Trade when resources are out of balance across the world. It highlights a privileged balance between two countries, each with its own resources.

The model is not limited to exchanges goods. It also incorporates other factors of production such as labour. Labor costs vary from country to country, so countries with cheap labor should mainly focus on production intensive work goods, depending on the model.

Evidence in support of the Heckscher-Ohlin model

Although the Heckscher-Ohlin model seems reasonable, most economists have struggled to find evidence to support it. A variety of other models have been used to explain why industrialized and developed countries have traditionally tended to trade with each other and are less dependent on trade with developing markets.

The Linder’s hypothesis describes and explains this theory. It states that countries with similar incomes need products of similar value and this leads them to trade with each other.

Concrete example of the Heckscher-Ohlin model

Some countries have large oil reserves but have very little iron ore. Meanwhile, other countries can easily access and store precious metalsbut they have little agriculture.

For example, the Netherlands exported nearly US$577 million in 2019, compared to imports that year of around US$515 million. Its first import-export partner was Germany. Importing on an almost equal basis allowed it to manufacture and supply its exports more efficiently and economically.

The model emphasizes the benefits of international trade and the global benefits for everyone when each country strives hardest to export resources that are naturally abundant domestically. All countries benefit when they import the resources they naturally lack. Because a nation does not have to rely solely on domestic markets, it can take advantage of elastic request. The labor cost increases and marginal productivity decreases as more countries and emerging markets develop. International trade allows countries to adapt to the production of capital-intensive goods, which would not be possible if each country only sold goods internally.

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