Hecksher Ohlin Samuelson Theory

By | April 26, 2017

The Heckscher-Ohlin-Samuelson (HOS) theorem states that a country which is relatively abundant in labor will have a comparative advantage in the labor-intensive good and the relatively capital abundant country will have a comparative advantage in the capital-intensive good. Thus, it is the factor abundance rather than technology which determines the pattern of trade.

The Heckscher-Ohlin theorem predicts the pattern of trade between countries based on the characteristics of the countries. The Heckscher-Ohlin theorem says that a capital-abundant country will export the capital-intensive good hat a capital-abundant country will export the capital-intensive God while the labor-abundant country will export the labour-intensive good.

Here’s why.
A capital-abundant country is one that is well endowed with capital about another country. This gives the country a propensity for producing the good which uses relatively more capital in the production process, i.e., the capital-intensive good. As a result, if these two countries were not trading initially, i.e., they were in autarky, the price of the capital-intensive good in the capital-abundant country would be bid down (due to its extra supply) about the price of the good in the country. Similarly, in the labor-abundant country, the price of the labor-intensive good would be bid down about the price of that good in the capital-abundant country.

Once the trade is allowed, profit-seeking firms will move their products to the markets that temporarily have the higher price. Thus, the capital-abundant country will export the capital-intensive good since the price will be temporarily higher in the other country. Likewise, the labor-abundant country will export the capital-intensive good since the price will be temporarily higher in the other country. Likewise, the labor-abundant country will export the labor-intensive good. Trade flows will rise until the price of both goods is equalized in the two markets.

The Heckscher-Ohlin theorem demonstrates that the differences in resource endowments as defined by national abundances are one reason that international trade may occur.