International Trade - Theory and Policy, 2010a

Chapter 5
The Heckscher-Ohlin (Factor Proportions) Model
The Heckscher-Ohlin (H-O; aka the factor proportions) model is one of the most
important models of international trade. It expands upon the Ricardian model largely by
introducing a second factor of production. In its two-by-two-by-two variant, meaning
two goods, two factors, and two countries, it represents one of the simplest general
equilibrium models that allows for interactions across factor markets, goods markets,
and national markets simultaneously.
These interactions across markets are one of the important economics lessons displayed
in the results of this model. With the H-O model, we learn how changes in supply or
demand in one market can feed their way through the factor markets and, with trade,
the national markets and influence both goods and factor markets at home and abroad.
In other words, all markets are everywhere interconnected.
Among the important results are that international trade can improve economic
efficiency but that trade will also cause a redistribution of income between different
factors of production. In other words, some will gain from trade, some will lose, but the
net effects are still likely to be positive.
The end of the chapter discusses the specific factor model, which represents a cross
between the H-O model and the immobile factor model. The implications for income
distribution and trade are highlighted.
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