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| Eli Hecksher and Bertil Ohlin |
The Hecksher-Ohlin Model of International Trade was put forth by Eli Hecksher and Bertil
Ohlin. It was built upon the foundations created by the theory of Comparative Advantage as propounded by David Ricardo. Alternatively, this theory is also
called as Factor Proportions Theory. It is important to note that
Comparative Advantage theory was unable to answer the question as to which
products would give a nation an advantage or what are the investments that are
to be made to select right product for a nation to have comparative advantage.
This theory precisely answered such questions.
Hecksher-Ohlin Model took into account production factors such as land,
labor and capital and not just labor cost alone. This model stated that
factors of production that are in greater supply to the existing demand would
be inexpensive and cost-effective and the factors of production that are
greater in demand relative to the supply would be more expensive. Thus the
countries must export and produce products that use their plentiful and
inexpensive factors and import products that use the rare and uncommon factors.
According to this model, the viability
and cost effectiveness of goods is determined by the input costs. Goods
with cheap input costs will be cheaper to produce than the goods requiring
scarce inputs.
A good example could be that of India that has
abundant. It can cheaply produce labor intensive goods like textile and
clothes.
Assumptions
1. The difference between Hecksher-Ohlin Model
and Ricardo’s Comparative Advantage Theory is that Ricardo took into account
only one factor of production in which the comparative advantage would exist
because of technological and other such differences. On the other hand,
Hecksher-Ohlin Model assumes that countries have identical production
technology for a particular commodity. Instead of technology, this model introduced
other factors of production. However, this model also assumes that the
production technology for producing two different commodities differ from each
other.
2. This model also assumes that the production
output leads to constant returns to scale. This basically means that if
all factors of production is increased, the output would also increase
proportionately. And if one factor of production is increased and others are
not, the output would not increase proportionately. This assumption is also in
consonance with the law of diminishing returns.
3. This theory assumes that factors of
production are mobile within a country. The same factors of production
can be used and diverted to produce different goods. It further assumes that
the factors of production are immobile between the countries i.e. labor and
capital are not identical everywhere and cannot be transferred freely between
nations.
4. This theory also accepts that prices of
goods are the same everywhere and there is perfect competition existing
in the domestic market of the countries.
Criticisms of Hecksher-Ohlin Model
1. Opponents of this model say that if this model
were true than a farmer could also perform the work of a fisherman as and when
required as this model assumes that factors of production are mobile within a
country.
2. The assumption of this model that factors of
production (labor and capital) are immobile between countries does not hold well
in today’s context. This is because capital controls have reduced and
cross-border investments have become a reality. Also movement of natural
persons across borders is taking at a large scale today.
3. The assumption of this model that commodity
prices are the same everywhere seems too simplistic and naïve as today we know
that prices of goods and commodities depend upon a number of factors such as
income, money flow in the market etc.
Leontief Paradox
An economist, Wassily W. Leontief undertook
a study in United States. In his study, he found that USA had abundant capital
and yet it exported labor-intensive goods and imported capital-intensive
goods. He conducted an econometric study in order to prove his results. He
argued that the situation should have been exactly the opposite had the Hecksher-Ohlin
Model stood true to its word. The USA should have exported
capital-intensive goods and imported labor-intensive goods. This Paradox
showed that International Trade is more complex than previously thought
and is affected by a variety of dynamic factors. A single theory to explain
International Trade is neither desirable nor sufficient. In the next, we
will talk about the modern theories of International Trade.
Theories of International Trade:
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