Heckscher-Ohlin Model

The Heckscher-Ohlin model is a theory in economics that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources.

The model emphasizes the exportation of goods requiring factors of production that a country has in abundance. It also emphasizes the importation of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson expanded the original model through articles written in 1949 and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.

The model isn't limited to tradable commodities. It also incorporates other production factors such as labor. The costs of labor vary from one nation to another, so countries with cheap labor forces should focus primarily on producing labor-intensive goods, according to the model.

• The Heckscher-Ohlin model evaluates the equilibrium of trade between two countries that have varying specialties and natural resources.
• The model explains how a nation should operate and trade when resources are imbalanced throughout the world.
• The model isn't limited to commodities, but also incorporates other production factors such as labor.

Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets.

The Linder hypothesis outlines and explains this theory. It states that countries with similar incomes require similarly valued products and that this leads them to trade with each other.

Certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other countries can easily access and store precious metals, but they have little in the way of agriculture.

For example, the Netherlands exported almost $506 million in U.S. dollars in 2017, compared to imports that year of approximately $450 million. Its top import-export partner was Germany. Importing on a close to equal basis allowed it to more efficiently and economically manufacture and provide its exports.

The model emphasizes the benefits of international trade and the global benefits to all when each country puts the most effort into exporting resources that are domestically naturally abundant. All countries benefit when each import the resources it naturally lacks. Because a nation does not have to rely solely on internal markets, it can take advantage of elastic demand. The cost of labor increases and marginal productivity declines as more countries and emerging markets develop. Trading internationally allows countries to adjust to capital-intensive goods production, which would not be possible if the country only sold goods internally.