Heckscher-Ohlin model

Heckscher-Ohlin model: The Setting and Principal Results

Heckscher-Ohlin model: Deriving the Theorems

Heckscher-Ohlin model: Trade and Wages

The Heckscher-Ohlin (H-O) model, which originated in Heckscher (1919) and Ohlin (1933) and was formalized and given narrower interpretation by Samuelson (1948), differs fromthe Ricardian theory of comparative advantage in two key respects. First, the Ricardian theory assumes only one factor of production,which robs it of any ability to address the internal income distribution effects of international trade. In contrast, the H-O theory allows for two factors of production, which opens the door to internal income distribution effects of trade. Second, whereas the Ricardian theory relies on the differences in technology across countries as the source of international trade, the H-O theory assumes the existence of the same technology everywhere and relies on the international differences in factor endowments as the basis of trade.

Because the H-O model allows economists to analyze the income distribution effects and plausibly gives a central role to intercountry differences in factor endowment rather than technology, which diffuses relatively rapidly internationally, it has come to serve as themainworkhorse of trade theorists.The model leads to the conclusion that each country exports the goods that use its relatively abundant factor more intensively and such exports lead to a rise in the real and relative return to the latter. Symmetrically, the country imports products using its scarce factor more intensively, which lowers the real and relative return to the latter.

Recently, increased wage inequality in the rich countries as measured by skilled-to-unskilled wage has brought this model further to the center of the policy debate. Those favoring protection over free trade argue that just as the H-O model predicts, trade liberalization by skilled-labor-abundant rich countries has led to the rise in skilled-to-unskilled wage. Pro-free-trade economists argue, however, that the real culprit behind the phenomenon is technological advances in skilled-labor-intensive industries, which has led to a shift in demand in favor of skilled labor.

See also comparative advantage; factor endowments and foreign direct investment; Ricardian model; specificfactors model; trade and wages

FURTHER READING

• Bhagwati, Jagdish.1964. ‘‘ThePureTheory of International Trade: A Survey.’’ Economic Journal 74 (293): 1 84. Offers a careful survey of the development of the Heckscher Ohlin theory along with other theories of international trade.
•  Heckscher, Eli. 1919. ‘‘The Effect of Foreign Trade on the Distribution of Income.’’ Ekonomisk Tidskrift 21: 497 512. The original article to which the Heckscher Ohlin theory is traced. 
• Krugman, Paul. 1995. ‘‘GrowingWorld Trade: Causes and Consequences.’’ Brookings Papers on Economic Activity 1: 327 62. Argues that the rise in volume of imports from the developing countries in relation to the total expen diture is too tiny to explain the large increase in wage inequality during the 1980s and early 1990s in the United States.
•  Lawrence, Robert Z., and Mathew J. Slaughter. 1993. ‘‘International Trade andAmericanWages in the 1980s: Giant Sucking Sound or a Small Hiccup?’’ Brookings Papers on Economic Activity 2 (Microeconomics): 161 226. Shows that the prices of unskilled labor intensive goods relative to skilled labor intensive goods rose dur ing the phase that the unskilled wages fell in the United States. 
• Ohlin, Bertil. 1933. Interregional and International Trade. Cambridge, MA: Harvard University Press. First full scale statement of theHeckscher Ohlin theory inEnglish by one of its two originators.
•  Panagariya, Arvind. 2000. ‘‘Evaluating the Factor Content Approach to Measuring the Effect of Trade on Wage Inequality.’’ Journal of International Economics 50 (1): 91 116. Offers a detailed analysis of the relationship of the factor content of trade to factor prices in the H O model. 
• Rybczynski, T.M. 1955. ‘‘Factor Endowments and Relative Commodity Prices.’’ Economica 22 (87): 336 41. Inaugurated the systematic analysis of the effects of the changes in factor endowments on outputs. 
• Samuelson, Paul A. 1948. ‘‘International Trade and the Equalization of Factor Prices.’’ Economic Journal 58 (230): 163 84. Formalizes the Heckscher Ohlin model and shows that trade would lead to the equalization of factor prices. 
• Stolper, Wolfgang, and Paul A. Samuelson. 1941. ‘‘Pro tection and Real Wages.’’ Review of Economic Studies 9 (3): 58 73. Shows that in theH Omodel, the owners of the scarce factor are left unambiguously worse off by imports. 

ARVIND PANAGARIYA