Basic description of the Hecksher-Ohlin model, its assumptions and theorems.

1. Hecksher-Ohlin
trade model
jhuato.sfc@gmail.com

2. Goals
 Understand the setup of the Hecksher-
Ohlin model of trade, in which trade is
based on differences in productive factor
(input) endowments
 Understand the main theorems that result
from the Hecksher-Ohlin model of trade,
and apply the insights in the analysis of
real-world cases

3. Hecksher-Ohlin model
 There are two countries (H and F), two factors of production
(labor [L] and capital [K]), and two goods (corn [C] and
steel [S])
 The K/L ratio for H is higher than for F, i.e. H is capital-
abundant or labor-scarce, F is capital-scarce or labor-
abundant
 Same technology is available in H and F, there are constant
returns to scale in production, and C technology is labor-
intensive while S-technology is capital-intensive
 K and L move freely within each country, but not across
countries
 There is perfect competition within each country and, with
trade, the price of a good is the same in both countries
 Demand patterns (preferences) are identical in both
countries

4. Theorems derived from the
Hecksher-Ohlin model
1. Hecksher-Ohlin theorem
2. Stolper-Samuelson theorem
3. Factor-price equalization theorem
4. Rybczynski theorem

5. Hecksher-Ohlin theorem
With trade, the country with the higher K/L
ratio (e.g. H, which is K-abundant) will
export the good that is intensive in the use
of K (e.g. Steel) and import the good that is
intensive in the use of L (e.g. corn). The
pattern of trade of the other country will be
the converse.

6. Hecksher-Ohlin theorem

7. Stolper-Samuelson theorem
In each country, trade will increase the real
return of the abundant factor of production
and decrease the real return of the scarce
factor of production.
E.g. for H, where K is abundant and L is
scarce, trade will increase r/P and decrease
w/P, where r is the return on K (or “profit
rate”), w is the return on L (or wage rate), and P
is the price level.

8. Stolper-Samuelson theorem
At H, let MCS = a r + b w and MCC = c r + d w, where a, b, c, and d
are given physical input/output ratios. Under competition, P=MC:
PS = a r + b w (1) and PC = c r + d w (2).
Suppose that, due to trade, PS goes up and PC goes down. Since
steel uses K intensively compared to L and its output will
expand, then r will go up. If r increases and PC decreases, then by
(2) w must fall more than proportionally.
Also, since corn uses L intensively compared to K and its output
shrinks, then w will go down. If w decreases and PS increases, then
by (1) r must increase more than proportionally.
In other words, a shift in the output mix towards more steel and less
corn will have a magnified effect on r and w compared to PS and
PC. Therefore, r/P will go up and w/P will go down, where P is a
weighted average of PS and PC.

9. FPE theorem
 Compared to autarky, at H, the price of steel
increases and the price of corn drops, which
makes r go up and w go down (S-S theorem)
 Compared to autarky, at F, the price of steel
decreases and the price of corn increases, which
makes r* go down and w* go up (S-S theorem)
 This process continues to operate until the prices of
corn and steel are equalized in both countries,
which leads to r=r* and w=w*
 Little empirical evidence supporting the notion of
total equalization of factor prices

10. Final points
 All is required for trade is CA. As long as the MRTs
are not equal, the countries have a basis for
trading.
 With equal MRTs, the basis for trade cannot be
technology, i.e. resource requirement differences.
(They may still trade on the basis of preference
differences.)
 Without full employment, the model does not hold
any longer as the MRTs are undefined.
 It highlights an important source of trade.
Empirically: economists need to go and measure
the effect of these difference in technology (MRTs)
on observable trade. Results are mixed.

11. Rybczynski theorem
 Ifthe relative endowment of productive
factors changes in a country, the output
of the good intensive in the (relatively)
expanding factor will increase more than
proportionally
 E.g. if there is an increase in the
immigration of L to H (other things
equal), then the production of corn will
expand faster than L itself