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 in abundance. Also called HO model or 2x2x2 model, it is used to assess trade and, more specifically, trade balance between two countries that have different specialties and natural resources.
The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes importing goods that a nation cannot produce as efficiently. He believes that countries should ideally export materials and resources they have a surplus, while commensurately importing the resources they need.
Here is some important information about the Heckscher-Ohlin model.
- The Heckscher-Ohlin model assesses the balance of trade between two countries that have different specialties and natural resources.
- The model explains how a nation should operate and trade when resources are imbalanced in the world.
- The model is not limited to commodities, 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 article written by Eli Heckscher at the Stockholm School of Economics. His pupil, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson extended the original model through articles written in 1949 and 1953. Some call it the Heckscher-Ohlin-Samuelson model for this reason.
The Heckscher-Ohlin model mathematically explains how a country should operate and trade when resources are in imbalance in the world. It highlights a privileged balance between two countries, each with its own resources.
The model is not limited to tradable commodities. It also incorporates other factors of production such as labor. Labor costs vary from country to country, so low-labor countries should focus primarily on the production of labor-intensive goods, depending on model.
Evidence in support of the Heckscher-Ohlin model
While the Heckscher-Ohlin model seems reasonable, most economists have struggled to find any supporting evidence. Various other models have been used to explain why industrialized and developed countries traditionally look to trade with each other and rely less on trade with developing markets.
Linder’s hypothesis describes and explains this theory. He states that countries with similar incomes need products of similar value and this leads them to trade with each other.
Real 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 metals, but they have little agriculture.
For example, the Netherlands exported almost US $ 506 million in 2017, compared to imports of about $ 450 million that year. Its main import-export partner was Germany. Importing on an almost equal basis has enabled 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 puts the most effort into exporting naturally abundant resources domestically. All countries benefit when they import the resources they naturally lack. Since a nation does not have to rely solely on domestic markets, it can take advantage of the elasticity of demand. The cost of labor rises and marginal productivity declines as more countries and emerging markets develop. International trade allows countries to adjust to the production of capital-intensive goods, which would not be possible if each country only sold goods internally.