H-O Model

The Heckscher-Ohlin Model
(Factor Proportions Model)

 The Factor Proportions Model
 Main point: Comparative advantage is determined by
– Factor endowments of countries, together with
– Factor intensities of industries

Two differences drive trade in H-O Model
1. Countries differ in endowments of factors
2. Industries differ in factor intensities

Two differences drive trade in H-O Model
1. Countries differ in endowments of factors
– Labor
– Capital
– Land
– Skill (Human capital)
– Resources

Factor Endowment
 Country A is said to be capital abundant relative to Country B if (K/L)A > (K/L)B
– For example, if the U.S. has a capital stock of $4.3 trillion and a labor force of 121 million, then K/L is about $36,000.
– K/L for India works out to $607 billion/$304 million = $2,000.
– Therefore, the U.S. is capital abundant relative to
India; India is relatively labor abundant.

2. Industries differ in factor intensities
Examples:
– Agriculture uses lots of land
– Textiles & apparel use lots of unskilled labor
– Cars/vehicles use lots of capital (e.g. machinery)
– Computers use lots of human capital (skills)

Factor Intensity
 The capital-labor ratio for good Y is simply (K/L)Y and for X is (K/L)X
 If (K/L)Y > (K/L)X, production of good Y is capital intensive relative to production of good X
– For example, the amount of capital per worker in the
U.S. petroleum and coal industry is $468,000
– The similar figure for apparel products is $8,274
– Therefore, petroleum and coal is produced in a relatively capital-intensive manner
 Also, production of X must be relatively labor intensive. That is, if (K/L)Y > (K/L)X
,
then
(L/K)X > (L/K)Y

Implication of #1 and #2:
Countries have comparative advantage in, and therefore export, goods that use relatively intensively their relatively abundant factors

H-O Assumptions
• 2 countries
• 2 commodities
• 2 factors (labor and