Core idea
Proposed by the Swedish economists Heckscher and Ohlin. Where the Ricardian model explains comparative advantage by technology differences, Heckscher-Ohlin shows that even with identical technology, differing relative endowments of labor, capital and land create cost differences and trade. Ohlin shared the 1977 Nobel Prize in economics.
Key assumptions
- Two countries, two goods, two factors (labor, capital)
- Identical technology and preferences
- Perfect competition, constant returns to scale
- Factors mobile within but not between countries
Related theorems
- Factor price equalization (Samuelson): trade in goods alone tends to equalize wages and returns to capital.
- Stolper-Samuelson (1941): a rise in a good's price raises the real return of the factor used intensively in it, so trade benefits owners of abundant factors and hurts owners of scarce ones.
- Rybczynski: growth in one factor expands output of the good intensive in it and reduces the other.
The Leontief paradox
Leontief (1953) found that the capital-abundant United States exported labor-intensive goods. Later work showed the theory fits better once skilled labor (human capital), natural resources and technology differences are included.
Example
When labor was relatively abundant, South Korea exported textiles and footwear; as capital and skills accumulated, semiconductors and cars came to dominate exports.
References
- Ohlin, B. (1933). Interregional and International Trade. Harvard University Press.
- Stolper, W. F., & Samuelson, P. A. (1941). Protection and real wages. Review of Economic Studies, 9(1), 58-73.
- Leontief, W. (1953). Domestic production and foreign trade: The American capital position re-examined. Proceedings of the American Philosophical Society, 97(4), 332-349.
- Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson.