Hecksher-ohlin theory of international trade

The Heckscher-Ohlin Theory of Trade
Also known as Factor-Endowment Theory of Trade
Or
Modern Theory of Trade



Helps in predicting trade patterns Countries rich in manual work (Labour
between two countries having intensive)exports labour intensive
different resources and goods.
specialities Countries rich in Automatic work
(capital intensive)exports capital
intensive goods .


Why do countries trade ?

Countries trade because of difference in relative price of different goods
And this price difference arises due to cost differences (Cost of production )


Different factor endowment in different countries

Some have more capital (like USA)
Some have more labour (like India)


Countries with more capital (K) exports capital intensive goods
Countries with more Labour (L)exports labour intensive goods.


2 Countries A B 2 2 2 Model
2Factors K L K - Capital intensive
2 Goods X Y L-Labour intensive


Basic assumptions
Two countries share same production technology
Markets are perfectly competitive
e- Assumptions


Constant Returns to scale exists in the economy
There is no transport costs