Theoretical Framework: The Heckscher-Ohlin Theorem

Theoretical Framework: The Heckscher-Ohlin theorem
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Theoretical Framework: The Heckscher-Ohlin theorem
The trading patterns differ depending on the patterns of production. This will also give a reflection that clearly shows a difference in the endowments’ compositions. For international trade to work effectively, countries are encouraged to specialize in the production of those activities that require those factors that are in similar proportions to the bundle of endowment. However, these countries are to discourage the production of those activities that require factors which are not proportionate to those at home (Britannica.com, 2016). Heckscher – Olin theorem further states that, it will only be relevant if the quality of the factors of production, differs in the degree of quality hence a difference in the factor requirement. This theory majorly focuses on two factors of production, capital and labor. This was unlike Ricardo’s comparative advantage model that only focused on one factor, labor. Some countries are capital intensive. Such countries will witness high labor costs. This will greatly raise the cost of producing some products like for example, textiles, and simple consumer products as compared to those countries that are labor intensive with minimum wage. This therefore means that, those countries that have a lot of capital, are better placed to produce capital intensive products inexpensively. They will then export the products and import the labor-intensive products. This however, was criticized in the Leontief Paradox who clearly observed that whatever America was exporting, was more labor-intensive than the imports. America is well known for its soundness in capital. This was a complete opposite of the situation (Jones, n.d).
This theorem can be clearly illustrated in the case of a tiny nation like Luxembourg and a vast country like India (Britannica.com, 2016). Per worker, the former has more capital than India. In this scenario, Luxembourg will do the exportation of the products that are capital-intensive to India and import those that require more labor from India in return (Britannica.com, 2016). Another very good example is that one of an oil producing country, especially those in the middle East. They would focus more on the production of oil for export purposes to be able to finance their imports profitably. This region is majorly a desert and as such, most of their food supplies are imported.