Heckscher-Ohlin Theory

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Introduction

Two Swedish economists Eli Heckscher (1919) and Bertil Ohlin (1933) laid the substantial developments on David Ricardo’s theory of comparative advantage by focusing on the relationships between national factor endowments and commodity trade patterns. Though there have been some attempts to use the Heckscher-Ohlin theory, it seems invalidity in most real-world international trade patterns.

In order to evaluate the validity of the Heckscher-Ohlin theory in today’s environment, pros and cons of the statement are illustrated as following. In pro terms, this theory is a simple international trade model with only two nations, two products and two factors of production based on the similar technology. Because of its simplified
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In terms of these assumptions, economists can explicitly develop implications about how trade affects wages and returns on capital as well as the economic growth on trade without considering other factors of production.

Because of its simplified assumptions, the Heckscher-Ohlin theory can provide significant and accurate analysis in theoretical grounds. For example, the United States has long been a substantial exporter of computer software and high-tech electronic devices, reflecting its great number of capital and skilled labour. Conversely, China exports a large amount of labour-intensive manufacturing products, which reflects relative abundance of low-cost labour in China.

Criticisms of the Heckscher-Ohlin Theory

Unfortunately, though this theory is simple and gives easily observable predictions, the predictions are not satisfied by the empirical data. Beginning with a troubling discovery of Wassily Leontief (1953), the estimation on imports indicates that capital-labour ratio of U.S. imports is higher than that of its exports (UKEssay, 2013). In other words, the United States as the most capital abundant country in the world exported less capital-intensive products in that period and this appears to contradict the Heckscher-Ohlin theory, known as Leontief Paradox. The following data about factors (capital and labour) of U.S. exports and imports for 1962
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