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The Heckscher-Ohlin Model

The Heckscher-Ohlin model developed by Bertil Ohlin and Eli Heckscher, a mathematical model with a general equilibrium concept that is an improvement of David Ricardo’s comparative advantage theory. The Heckscher-Ohlin model is based on the principle that the commodities in the trading arena are a composite of the factors of production, which are land, capital, and labour. It involves the international exchange of goods and the transfer of services which are produced by the immobile factors of production in locations of abundance to where they are scarce. The latter statement means that countries are more likely to export commodities that are produced by their cheap and abundant factors and import those that require their scarce factors of production. This is referred to as indirect factor arbitrage, which under given conditions is capable of eliminating the factor-price differences. The assumptions of this model include;

  • Existence of perfect competition
  • The factors of production are considered immobile between countries
  • Mobility of factors within the country
  • There is constant returns to scale of the output
  • There is uniform production technology in both countries
  • There is a difference in the technologies used in the production of the two commodities.
  • The prices of the commodities are same everywhere

The major implication of the Heckscher- Ohlin model is that it fosters factor market globalization in trade since it creates a platform for selling the factor services externally. This results to a derived elastic demand and uniformity across the different countries. According to HO model, the tariffs and quotas exhibit beneficial redistributive effects but have the capability of reducing the efficiency levels hence it is advisable for a country with the goal of redistribution to seek alternative methods. Moreover, the model helps us unravel the different patterns that exist in international trade. When it comes to the concept of partial-equilibrium, the HO model exposes its limitations.