Heckscher-Ohlin Model

Updated on January 29, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Heckscher-Ohlin Model?

The Heckscher-Ohlin model, also known as the H-O model or 2X2X2 model, is a theory in international trade that suggests that nations export goods that they produce efficiently and in abundance. It was developed by Swedish economist Eli Heckscher and his student Bertin Ohlin, hence the name. Later, economist Paul Samuelson contributed a few additions. Therefore, a few references to this model as a Heckscher-Ohlin-Samuelson model.

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Countries export great products or products for which they have the material/labor in abundance. These countries have a competitive advantage for such goods, including land, labor, and capital, which is the basis for this model. Not just abundance, the cost of production or procurement has to be cheaper in such countries.

Key Takeaways

  • The Hecksher-Ohlin model, also known as the H-O model or 2x2x2 model, is a theory in international trade that suggests that nations export goods in plenty and produce skillfully.
  • It was developed by Swedish economist Eli Heckscher and his student Berlin Ohlin. Later, economist Paul Samuelson made a few additions. Hence, Heckscher-Ohlin-Samuelson model.
  • It is called the 2x2x2 model because it comprises two countries. In addition, the two countries are involved in the two goods trading.
  • The four components of the theory are the factor price equalization theory, Stolper-Samuelson Theory(SST), Rybczynski Theorem, and Heckscher-Ohlin Trade Theorem.

Heckscher-Ohlin Model Explained

The Heckscher-Ohlin model postulates that countries export what they can produce. This model proposes that countries export what they can create abundantly or what they are already in abundance or in reserves. A country will have a comparative advantageComparative AdvantageIn order to determine comparative advantage, the opportunity cost of each item from each country needs to be calculated. Then, on a comparative table, these costs are plotted to get the comparative advantage.read more in the good that intensively uses its relatively abundant factor. Though this model proves to be better than the traditional model, it adopts assumptions that are tough to accept and expect.

It is also known as the 2X2X2 model given the involvement of two countries in the process of trading two goods. As there are two homogeneous production factors required for the same, the model is called so.

There is a large relative supply of a factor, say capital. Therefore, it results in a low relative price of capital in the country. That, in turn, results in cheaper capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more goods in the country. Hence, the government would have a competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more that opens up mutually beneficial trade.

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Assumptions

The Heckscher-Ohlin model assumptions that one must be aware of include the following:

Components

The four major components of the theory are as follows:

Heckscher Ohlin-Model

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Example

Let us consider a real-life Heckscher-Ohlin model example to understand how it works:

Saudi Arabia holds around 18% of the world’s petroleum reserves and ranks as the largest exporter of petroleum and second-largest producer. Oil in Saudi is available plenty and closer to the earth’s surface. Hence, extracting oil in Saudi Arabia is cheaper and more profitable than in many other places.

Criticism

Though the Heckscher-Ohlin model of international trade is beneficial for the countries as they know what they produce and abundance and hence can choose to export the same for the nations looking for the same product. However, there are issues that exist in this theory. Some of the problem areas of the model are:

Heckscher-Ohlin Model Vs Ricardian Model

The Heckscher-Ohlin model is a better explanation of the world economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more after World War II.

  • The traditional Ricardian theory overlooked the demand factors and completely focused on the supply factors. The H-O model is relatively better and considers both supply and demand. It ignored capital and assumed labor was the only factor of production. Hence, this classical theory accredits any cost difference to the differences in labor.
  • The H-O model is more specific and realistic when compared to the classical approach. This model also brings about integration between trade theories and value theories.

Frequently Asked Questions (FAQs)

What is the difference between the Specific Factors model vs Heckscher-Ohlin?

The prime difference between the Specific Factors model and the Heckscher-Ohlin model is that the factors in the Specific Factors are immobile. In contrast, all the factors in the Heckscher-Ohlin model are movable.

What is the Heckscher-Ohlin model comparative advantage?

Heckscher-Ohlin model comparative advantage as countries with abundant capital and scarce labor may likely export capital-intensive and labor-intensive import products. Conversely, countries with abundant labor and scarce capital will export labor-intensive and capital-intensive import products.

What is Neo-Heckscher-Ohlin model?

Neo-Heckscher-Ohlin(HO) model blends comparative technological advantage, international capital mobility, trade costs, and comparative endowment advantage. 

What does Heckscher-Ohlin (H-O) model postulates?

The Heckscher-Ohlin(H-O) model postulates that suppose two countries generate two goods utilizing two factors of production. Each will export the good, which makes the factor much use.

This article has been a guide to what is the Heckscher-Ohlin model. Here we explain its assumptions along with an example, vs Ricardian model, and components. You can learn more about accounting from the following articles: –

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Comments

  1. Dr.Aliya Sultana says

    A very good explanation of the theory alo g with the contradictions. Extremely helpful content in teaching and also preparation of the study material.

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