What is the Heckscher-Ohlin Model of Trade?
Explaining the two-factor model
The Heckscher-Ohlin model was developed by the Swedish economists Eli Heckscher and Bertil Ohlin to study how comparative advantage is influenced by the relative abundance of factors within a country. While the Ricardian model of trade accounts for labor as the only factor of production, the Heckscher-Ohlin model accounts for the proportions in which different factors of production are available in different countries.
Because this model examines the proportions of different production factors, it is sometimes referred to as the factor-proportions theory.
The most basic version of the factor-proportions theory is the two-factor model, which studies trade between two countries that are both producing two goods and have two factors of production.
As an example, suppose that South Africa and Botswana are trading. Both countries produce diamonds and automobiles, and the two factors of production that impact trade are labor in the diamond industry and capital in the automobile industry.
For Botswana, the amount of each good that is produced can be determined in the following function:
In these equations, QA and QD represent the output of both automobiles and diamonds, KA and KD represent the…
