Advantages Of Heckscher-Ohlin Model

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Comparative advantage is affected by the interplay between the resources available to a country (the relative abundance of factors of production) and the production technology (which affects the intensity through which the factors of production are used in the production process). What we understand from the Heckscher-Ohlin model is that international trade is by and large directed by the differences in resources or in other words, the existence of differences in economies’ resources is the cornerstone of trade.
It is important to state that Heckscher-Ohlin theory does not contradict the Ricardian one which is based on the assumption that international trade is based on differences in comparative costs. Actually Heckscher-Ohlin theory tries
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According to the above, we can predict the structure of trade, namely the exported and the imported commodities once we are aware of the relative abundance of factors of production and the differences in factor proportions required for the production of different goods. The model attempts to provide a more realistic approach regarding the fact that resources are imbalanced between countries. For example, there are economies that are oil-abundant (e.g. Middle-East); others have a relative abundance in agriculture (e.g. Greece) whereas in others there is a relative abundance of labour (e.g.…show more content…
Under this result, demand of this factor will outweigh supply. However, if there is abundance of capital and scarcity of land in a country but there is a great demand for capital; capital would be relatively more expensive than land. This is known as Leontief Paradox (1953). Empirical testing of the American trade structure led to this result. Although America is capital abundant, its imports are composed of capital-intensive goods whereas exports are composed of labour- intensive goods; a fact which is irrelevant to what the Heckscher-Ohlin theory suggested. However, Leontief Paradox has disappeared after 1970s.
Trefler (1995) compares actual international trade and expected trade according to endowment differences and finds that actual trade is too low. Thus he concludes, a paart of trade is actually “missing”. His study provides evidence that the Heckscher-Ohlin theory explains direction of North-South trade well but under-explains trade
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