11 - The Heckscher–Ohlin theory of international trade

Summary

The Heckscher–Ohlin theorem

Ricardo found the cause of foreign trade in the relative immobility of capital across national frontiers and he explained the commodity composition of world trade by persistent differences in the productivity of labor between nations; by assuming that relative commodity prices vary proportionately with relative labor costs, he showed that free trade will cause each country to export those goods in which it possessed a comparative price advantage and that such trade will result in mutual gain as compared to a state of self-sufficiency.

Ricardian theory made no attempt to explain the underlying productivity differences that give rise to intercountry variations in comparative costs, which in turn give rise to international trade. In the modern Heckscher-Ohlin theory, these productivity differences themselves are traced to intercountry differences in initial factor endowments, which indeed are made to carry the entire burden of the explanation: the more obvious causes of the commodity composition of foreign trade, such as international differences in the quality of factors, as well as differences in production functions for given products, are deliberately excluded by assumption. The Heckscher–Ohlin theory culminates in what is now generally known as the Heckscher–Ohlin theorem (HOT) of the pattern of international trade: a country exports those goods whose production is intensive in the country's relatively abundant factor and imports other goods that use intensively the country's relatively scarce factor.