Resources and Trade:
The Heckscher-Ohlin Model
If labor were the only factor of production, as the Ricardian model assumes,
comparative advantage could arise only because of international differences in
labor productivity. In the real world, however, while trade is partly explained by
differences in labor productivity, it also reflects differences in countries’ resources.
Canada exports forest products to the United States not because its lumberjacks are
more productive relative to their U.S. counterparts but because sparsely populated
Canada has more forested land per capita than the United States. Thus a realistic
view of trade must allow for the importance not just of labor, but also of other
factors of production such as land, capital, and mineral resources.
To explain the role of resource differences in trade, this chapter examines a
model in which resource differences are the only source of trade. This model
shows that comparative advantage is influenced by the interaction between
nations’ resources (the relative abundance of factors of production) and the technology
of production (which influences the relative intensity with which different
factors of production are used in the production of different goods). Some of these
ideas were presented in the specific factors model of Chapter 4, but the model we
study in this chapter puts the interaction between abundance and intensity in
sharper relief by looking at long-run outcomes when all factors of production are
mobile across sectors.
That international trade is largely driven by differences in countries’ resources
is one of the most influential theories in international economics. Developed by
two Swedish economists, Eli Heckscher and Bertil Ohlin (Ohlin received the
Nobel Prize in economics in 1977), the theory is often referred to as the
Heckscher-Ohlin theory. Because the theory emphasizes the interplay between
the proportions in which different factors of production are available in different
countries and the proportions in which they are used in producing different
goods, it is also referred to as the factor-proportions theory.
To develop the factor-proportions theory, we begin by describing an economy
that does not trade and then ask what happens when two such economies trade
with each other. Since the factor-proportions theory is both an important and a
controversial theory, we conclude the chapter with a discussion of the empirical
evidence for and against the theory.
CHAPTER 5 Resources and Trade: The Heckscher-Ohlin Model 81
LEARNING GOALS
After reading this chapter, you will be able to:
• Explain how differences in resources generate a specific pattern of trade.
• Discuss why the gains from trade will not be equally spread even in the long
run and identify the likely winners and losers.
• Understand the possible links between increased trade and rising wage
inequality in the developed world.
The Heckscher-Ohlin Model
If labor were the only factor of production, as the Ricardian model assumes,
comparative advantage could arise only because of international differences in
labor productivity. In the real world, however, while trade is partly explained by
differences in labor productivity, it also reflects differences in countries’ resources.
Canada exports forest products to the United States not because its lumberjacks are
more productive relative to their U.S. counterparts but because sparsely populated
Canada has more forested land per capita than the United States. Thus a realistic
view of trade must allow for the importance not just of labor, but also of other
factors of production such as land, capital, and mineral resources.
To explain the role of resource differences in trade, this chapter examines a
model in which resource differences are the only source of trade. This model
shows that comparative advantage is influenced by the interaction between
nations’ resources (the relative abundance of factors of production) and the technology
of production (which influences the relative intensity with which different
factors of production are used in the production of different goods). Some of these
ideas were presented in the specific factors model of Chapter 4, but the model we
study in this chapter puts the interaction between abundance and intensity in
sharper relief by looking at long-run outcomes when all factors of production are
mobile across sectors.
That international trade is largely driven by differences in countries’ resources
is one of the most influential theories in international economics. Developed by
two Swedish economists, Eli Heckscher and Bertil Ohlin (Ohlin received the
Nobel Prize in economics in 1977), the theory is often referred to as the
Heckscher-Ohlin theory. Because the theory emphasizes the interplay between
the proportions in which different factors of production are available in different
countries and the proportions in which they are used in producing different
goods, it is also referred to as the factor-proportions theory.
To develop the factor-proportions theory, we begin by describing an economy
that does not trade and then ask what happens when two such economies trade
with each other. Since the factor-proportions theory is both an important and a
controversial theory, we conclude the chapter with a discussion of the empirical
evidence for and against the theory.
CHAPTER 5 Resources and Trade: The Heckscher-Ohlin Model 81
LEARNING GOALS
After reading this chapter, you will be able to:
• Explain how differences in resources generate a specific pattern of trade.
• Discuss why the gains from trade will not be equally spread even in the long
run and identify the likely winners and losers.
• Understand the possible links between increased trade and rising wage
inequality in the developed world.
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