Briefly explain Heckscher-Ohlin Theory in International Trade

May 8th, 2013 Comments off
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Below tabulates Heckscher-Ohlin Theory in International Trade:-

Unlike the Comparative Advantage Theory which advocates on specializing in activities which is more efficient, Heckshcher-Ohlin Theory advocates that :-

  • A country should specialize in the production of good where the factors of production ( capital,labor, land) favour it. Example like if there is a relative abundance in capital, it will cause the capital-abundant country to produce capital-intensive good cheaper than the labor-abundant country and vice versa
  • Suggests that countries will export goods that maximizes abundant resources while importing goods that utilize scarce resources.

Note that in Heckscher-Ohlin Theory, even though countries as a whole benefits not all groups in a society gain. For example, if in international trade leads a country to specialize in the production of goods that require a lot of workers and little capital  such a specialization increases wages benefiting the workers but decreases the income of capital owners –however the country as a whole benefits because what the workers gain is more than the loss of the capital owners.

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