Limitations of the Hecksher Ohlin Theory

2414 Words Jun 25th, 2012 10 Pages

In the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. This theory differs from the theories of comparative advantage and absolute advantage since these theory focuses on the productivity of the production process for a particular good. On the contrary, the Heckscher-Ohlin theory states that a country should specialise production and export using the factors that are most abundant,
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Potential agreements place great risk on countries, as trade results can be unpredictable, where trade creations is the only country gain, whilst negatives can be surround the use of low-cost imports from outside the zone with higher cost goods from member nations leads to a trade diversion were a country loses.


Trade policy in developing countries is concerned with two objectives: promoting industrialization and coping with the uneven development of the domestic economy, as this cannot be analysed the same as advanced countries.

As many less developed nations have pursued policies of importing substituting industrialization, has not benefited and not delivered he expected gains in economic growth and living standards, highlighting that its lead to the results of import substitution, and fostered high-cost / inefficient production.

High performing economies have industrialized not via imports substitutions but via exports of manufactured goods. Highlighting that economic development is spread, and that the fact that high performing economies do
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