Heckscher Ohlin Model

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 those goods which are in abundance and which they can produce efficiently. This was developed by a Swedish economist Eli Heckscher and his student Bertil Ohlin and hence the name. Later, economist Paul Samuelson contributed a few additions and hence this model is referred to as a Heckscher-Ohlin-Samuelson model by a few.

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

Why is it Called 2X2X2 Model?

The reason is simple, – there are two countries. Two countries engage in trading of two goods. There are two homogeneous production factors required for the same.

Assumptions of the Heckscher Ohlin Model

Intuitions of Heckscher Ohlin Model

There is a large relative supply of a factor, say capital. This results in a low relative price of capital in the country. This, 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. And hence, the country would have a competitive advantage for that country which opens up the possibility of mutually beneficial trade.

Components of the Heckscher Ohlin Model

The four major components of the theory are as follows:

Heckscher Ohlin-Model

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Heckscher Ohlin Model (wallstreetmojo.com)

How is the Heckscher Ohlin Model Superior to Classical Theory?

  • It is a better explanation of the world economy after the second world war.
  • The traditional Ricardian theory overlooked the demand factors and completely focused on the supply factors. The H-O model is relatively better and takes into account both supply and demand.
  • The Classical theory ignored capital and assumed labor as the only factor of production.
  • The classical theory hence accredits any difference in costs to the differences in labor.
  • The H-O model is hence more specific and realistic when compared to the classical theory.
  • This model also brings about integration between trade theories and value theories.

Real-Life Example and Study

Saudi Arabia holds around 18% of the world’s petroleum reserves and ranks as the largest exporter of petroleum and second-largest producer. Petroleum in Saudi is not only available in plenty but also closer to the earth’s surface. Hence, it is cheaper and profitable to extract petroleum in Saudi Arabia than from many other places. This can be taken as an example of the H-O model.

Criticism

  • Poor prediction and performance.
  • The unfair assumption that all labor is employed. This model assumes that all labor in the country is employed thus ignoring the concept of unemployment.
  • The unrealistic assumption that identical production exits. This model assumes that nations have the same technology being used for production undermining the effects and ignoring the technological gaps.
  • Logical Flaws – Capital is assumed as being homogeneous and transferrable between countries.

To sum up, this model postulates that countries export what they can produce abundantly or what they already in abundance of (reserves) and 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 uses its relatively abundant factor intensively. Though this model has been proven to be better than the traditional model, this model adopts assumptions that can hardly be expected to be fulfilled.

This has been a guide to what is the Heckscher-Ohlin Model and its definition. Here we discuss components, assumptions, institutions, an example of the h-o model. You can learn more about accounting from following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *