Heckscher-Ohlin theorem
Encyclopedia : H : HE : HEC : Heckscher-Ohlin theorem
The Heckscher-Ohlin theorem is one of the four critical theorems of the Heckscher-Ohlin model. It states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good."
The critical assumption of the model Heckscher-Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same. The relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant country and vice versa.
Initially, when the countries are not trading:
- the price of capital-intensive good in capital-abundant country will be bid down relative to the price of the good in the other country,
- the price of labor-intensive good in labor-abundant country will be bid down relative to the price of the good in the other country.
- the capital-abundant country will export the capital-intensive good,
- the labor-abundant country will export the labor-intensive good.
References
- Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
Correct Source: Appleyard, Field, & Cobb. (2006). International Economics (5th ed.). McGraw-Hill Irwin. ISBN 0-07-287737-5.
From Wikipedia, the Free Encyclopedia. Original article here. Support Wikipedia by contributing or donating.
All text is available under the terms of the GNU Free Documentation License See Wikipedia Copyrights for details.