Explore (some of) the determinants of comparative advantage
Explore effect that international trade has on earnings of factors in trading countries
Eli Hecksher was a Swedish economist
He & his student Bertil Ohlin developed a model to explain international trade
They were writing during the late 1910s, during the “golden age of international trade” before WWI
Wanted to explain the enormous burst of trade during their lifetimes
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
“Second industrial revolution” c.1890-1914, especially in United States
Massive improvements & innovation in transportation & supply chains
Massive increase in international trade until WWI (1914)
Unlike Ricardo: it’s not differences in technology/productivity across countries that cause trade
It’s the uneven distribution of resources, the factors of production: land, labor, capital
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
![]() |
![]() |
![]() |
Relatively land abundant | Relatively capital abundant | Relatively labor abundant |
Exports timber, agricultural products | Exports services, sophisticated manuf. | Exports basic manuf. |
Hecksher-Ohlin (H-O) Theory: focus on differences in relative abundance of factors of production across countries
H-O Theory is often expressed as the combination of several “theorems”...
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
1) Hecksher-Ohlin (H-O) Theorem: a nation will export the good whose production requires the intensive use of the nation’s relatively abundant factor, and import the good whose production requires the intensive use of the nation’s relatively scarce factor
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
2) Factor Price Equalization (FPE) Theorem: under certain conditions, international trade tends to bring about equalization in relative and absolute returns to homogeneous factors across nations
3) Stolper-Samuelson Theorem: in the long run, an increase in the relative price of a good will increase the real earnings of the factor used intensively in that good’s production and decrease the earnings of the other factor
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
Imagine 2 countries, Home and Foreign
Countries have two factors of production:
All factors of production are mobile (non-specific) within a country, but not internationally
Each country has two industries, computers (c) and shoes (s)
Shoe production (s) is relatively labor-intensive, requiring a higher labor to capital ratio lk
Computer production (c) is relatively capital-intensive, requiring a lower labor to capital ratio lk
lckc<lsks
Foreign is relatively labor-abundant, with a high labor to capital ratio, LK
Home is relatively capital-abundant, with a low labor to capital ratio, LK
LK<L′K′
Both factors are required to produce each good
Final products are traded freely
Technology is identical across countries
Consumer preferences are identical across countries and do not vary with income
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
Shoe production (s) is relatively labor-intensive good, requiring a higher labor to capital ratio lsks
Computer production (c) is relatively capital-intensive good, requiring a lower labor to capital ratio lckc
Key is relative factor intensity!
In absolute terms, computers could need more labor to make than shoes, but if computers require more capital per worker than shoes, they are relatively more capital-intensive (and vice versa)!
Foreign is relatively labor-abundant, with a high labor to capital ratio, LK
Home is relatively capital-abundant, with a low labor to capital ratio, LK
Key is relative factor abundance!
In absolute terms, Home could have more labor than Foreign, but if Foreign has more labor per unit of capital than Home, Foreign is relatively more labor-abundant (and vice versa)!
Consider relative factor uses and relative factor prices
Note: I'll always do everything in terms of labor (labor-to-capital ratio lk and labor-to-capital return wr) for consistency
How much lk a country uses depends on the relative price of labor wr
A country's economy-wide relative demand for labor is an average of the lsks and lckc relative labor demand curves
A country is endowed with a fixed relative supply of labor ¯LK
A country's economy-wide relative demand for labor is an average of the lsks and lckc relative labor demand curves
A country is endowed with a fixed relative supply of labor ¯LK
Intersection of relative supply and relative demand sets country’s relative wage rate wr
Both countries exchange their imports & exports and consume at C and C'
Both reach a higher indifference curve with trade, well beyond their PPFs!
Let's look at Home
Increase in the relative price of computers from trade
Fixed relative labor supply ¯LK
Decrease in relative labor demand
Lowers relative wages wr
Let's look at Foreign
Increase in the relative price of shoes from trade
Fixed relative labor supply ¯L′K′
Increase in relative labor demand
Raises relative wages wr
Real income changes at Home in the long-run, when both L and K are mobile:
Increase in the relative price of computers (fall in relative price in shoes) ⟹ fall in relative price of labor wr (rise in relative price of capital)
This implies both industries will use relatively more labor (cheaper) and less capital (more expensive)
Using more labor, less capital, (because ↓wr) across both industries:
Change in real wages: pc∗MPLc=w=ps∗MPLs
Change in real income to capital: pc∗MPKc=r=ps∗MPKs
Real income changes at Foreign in the long-run, when both L and K are mobile:
Increase in the relative price of shoes (fall in relative price in computers) ⟹ rise in relative price of labor wr (fall in relative price of capital)
This implies both industries will use relatively less labor (more expensive) and more capital (cheaper)
Using less labor, more capital (because ↑wr) across both industries:
Change in real wages: pc∗MPLc=w=ps∗MPLs
Change in real income to capital: pc∗MPKc=r=ps∗MPKs
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Explore (some of) the determinants of comparative advantage
Explore effect that international trade has on earnings of factors in trading countries
Eli Hecksher was a Swedish economist
He & his student Bertil Ohlin developed a model to explain international trade
They were writing during the late 1910s, during the “golden age of international trade” before WWI
Wanted to explain the enormous burst of trade during their lifetimes
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
“Second industrial revolution” c.1890-1914, especially in United States
Massive improvements & innovation in transportation & supply chains
Massive increase in international trade until WWI (1914)
Unlike Ricardo: it’s not differences in technology/productivity across countries that cause trade
It’s the uneven distribution of resources, the factors of production: land, labor, capital
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
![]() |
![]() |
![]() |
Relatively land abundant | Relatively capital abundant | Relatively labor abundant |
Exports timber, agricultural products | Exports services, sophisticated manuf. | Exports basic manuf. |
Hecksher-Ohlin (H-O) Theory: focus on differences in relative abundance of factors of production across countries
H-O Theory is often expressed as the combination of several “theorems”...
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
1) Hecksher-Ohlin (H-O) Theorem: a nation will export the good whose production requires the intensive use of the nation’s relatively abundant factor, and import the good whose production requires the intensive use of the nation’s relatively scarce factor
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
2) Factor Price Equalization (FPE) Theorem: under certain conditions, international trade tends to bring about equalization in relative and absolute returns to homogeneous factors across nations
3) Stolper-Samuelson Theorem: in the long run, an increase in the relative price of a good will increase the real earnings of the factor used intensively in that good’s production and decrease the earnings of the other factor
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
Imagine 2 countries, Home and Foreign
Countries have two factors of production:
All factors of production are mobile (non-specific) within a country, but not internationally
Each country has two industries, computers (c) and shoes (s)
Shoe production (s) is relatively labor-intensive, requiring a higher labor to capital ratio lk
Computer production (c) is relatively capital-intensive, requiring a lower labor to capital ratio lk
lckc<lsks
Foreign is relatively labor-abundant, with a high labor to capital ratio, LK
Home is relatively capital-abundant, with a low labor to capital ratio, LK
LK<L′K′
Both factors are required to produce each good
Final products are traded freely
Technology is identical across countries
Consumer preferences are identical across countries and do not vary with income
L: Eli Hecksher (1879-1952)
R: Bertil Ohlin (1899-1979)
Shoe production (s) is relatively labor-intensive good, requiring a higher labor to capital ratio lsks
Computer production (c) is relatively capital-intensive good, requiring a lower labor to capital ratio lckc
Key is relative factor intensity!
In absolute terms, computers could need more labor to make than shoes, but if computers require more capital per worker than shoes, they are relatively more capital-intensive (and vice versa)!
Foreign is relatively labor-abundant, with a high labor to capital ratio, LK
Home is relatively capital-abundant, with a low labor to capital ratio, LK
Key is relative factor abundance!
In absolute terms, Home could have more labor than Foreign, but if Foreign has more labor per unit of capital than Home, Foreign is relatively more labor-abundant (and vice versa)!
Consider relative factor uses and relative factor prices
Note: I'll always do everything in terms of labor (labor-to-capital ratio lk and labor-to-capital return wr) for consistency
How much lk a country uses depends on the relative price of labor wr
A country's economy-wide relative demand for labor is an average of the lsks and lckc relative labor demand curves
A country is endowed with a fixed relative supply of labor ¯LK
A country's economy-wide relative demand for labor is an average of the lsks and lckc relative labor demand curves
A country is endowed with a fixed relative supply of labor ¯LK
Intersection of relative supply and relative demand sets country’s relative wage rate wr
Both countries exchange their imports & exports and consume at C and C'
Both reach a higher indifference curve with trade, well beyond their PPFs!
Let's look at Home
Increase in the relative price of computers from trade
Fixed relative labor supply ¯LK
Decrease in relative labor demand
Lowers relative wages wr
Let's look at Foreign
Increase in the relative price of shoes from trade
Fixed relative labor supply ¯L′K′
Increase in relative labor demand
Raises relative wages wr
Real income changes at Home in the long-run, when both L and K are mobile:
Increase in the relative price of computers (fall in relative price in shoes) ⟹ fall in relative price of labor wr (rise in relative price of capital)
This implies both industries will use relatively more labor (cheaper) and less capital (more expensive)
Using more labor, less capital, (because ↓wr) across both industries:
Change in real wages: pc∗MPLc=w=ps∗MPLs
Change in real income to capital: pc∗MPKc=r=ps∗MPKs
Real income changes at Foreign in the long-run, when both L and K are mobile:
Increase in the relative price of shoes (fall in relative price in computers) ⟹ rise in relative price of labor wr (fall in relative price of capital)
This implies both industries will use relatively less labor (more expensive) and more capital (cheaper)
Using less labor, more capital (because ↑wr) across both industries:
Change in real wages: pc∗MPLc=w=ps∗MPLs
Change in real income to capital: pc∗MPKc=r=ps∗MPKs