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5: The Heckscher-Ohlin (Factor Proportions) Model

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    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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