Heckscher-Ohlin Theory (Factor Proportions Theory)

Heckscher-Ohlin Theory (Factor Proportions Theory)
The Heckscher-Ohlin model evaluates the equilibrium of trade between two countries that have
varying specialties and natural resources. The model explains how a nation should operate and
trade when resources are imbalanced throughout the world. The model isn't limited to
commodities, but also incorporates other production factors such as labor.
The Heckscher-Ohlin model is an economic theory that proposes that countries export what

they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2
model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two
countries that have varying specialties and natural resources.
The model emphasizes the export of goods requiring factors of production that a country has in
abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently.
It takes the position that countries should ideally export materials and resources of which they
have an excess, while proportionately importing those resources they need.
Certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other
countries can easily access and store precious metals, but they have little in the way of
agriculture.
For example, the Netherlands exported almost $506 million in U.S. dollars in 2017 , compared
to imports that year of approximately $450 million. Its top import-export partner was Germany.
Importing on a close to equal basis allowed it to more efficiently and economically manufacture
and provide its exports.
Porter’s Diamond Theory
The Porter Diamond model explains the factors that can drive competitive advantage for one
national market or economy over another.2
It can be used both to describe the sources of a nation's competitive advantage and the path to
obtaining such an advantage.2
The model can also be used by businesses to help guide and shape strategy regarding how to
approach investing and operating in different national markets.
What do the four factors mean?

Firm Strategy and Rivalry is the competition in the home market that drives innovation and
quality. When there’s lots of competition and lots of rivalry, this keeps companies on their toes,
and so they try to out-compete each other by continually developing more innovative and quality
products and or services.
Factor Condition is a country with sophisticated homebuyers that have awareness and demand
for advanced, quality, and innovative products, which can create international competitiveness.
Related and Supporting Industries are the inputs for a country, which drives its success. For
example, the raw material from fabric suppliers in Italy helps to drive the success of the Milan
fashion industry.
Factor Input Conditions are the factors of production that includes things like skilled labour,
education, capital, climate, and infrastructure.
An example where Porter’s Diamond can be used to explain a regional advantage is in

Germany’s luxury high power car manufacturing industry, for brands such as Audi. The car
manufacturing industry in German has a regional advantage because it satisfies the four key
factors in Porter’s Diamond. With firm strategy and rivalry, we see that there is strong rivalry
amongst lots of car manufacturers and so they compete intensely and keep developing more
innovative and quality products.
New Trade Theory
New trade theory (NTT) suggests that a critical factor in determining international patterns of
trade are the very substantial economies of scale and network effects that can occur in key
industries.
New trade theory also becomes a factor in explaining the growth of globalization. It means that
poorer, developing economies may struggle to ever develop certain industries because they lag
too far behind the economies of scale enjoyed in the developed world. This is not due to any
intrinsic comparative advantage, but more the economies of scale the developed firms already
have.
Globalization has led to increased variety for consumers. The proliferation of brand clothing
labels. Firms competing in the model of monopolistic competition and heavy branding. Neither
UK or Italy has a particular comparative advantage in producing clothes, but consumers are
attracted to brand image of Italian and British fashion labels.
Leontief’s Paradox Theory
Leontief's paradox in economics is that a country with a higher capital per worker has a lower
capital/labor ratio in exports than in imports. This econometric finding was the result of Wassily
W. Leontief's attempt to test the Heckscher–Ohlin theory ("H–O theory") empirically.
For instance, both the United States and Germany are developed countries with a significant
demand for cars, so both have large automotive industries. Rather than one country dominating
the industry with a comparative advantage, both countries trade different brands of cars
between them.
Factor Endowment Theory
The factor endowment theory holds that countries are likely to be abundant in different types of
resources. In economic reasoning, the simplest case for this distribution is the idea that
countries will have different ratios of capital to labor. Factor endowment theory is used to
determine comparative advantage.
For example, a country with a high ration of capital to labor will be more efficient at producing
computers than it would corn. If that country instead focused on producing corn, it would have to
divert capital which is not meant for corn production into an area where it is inefficiently used.
Product Life Cycle Theory
The life cycle of a product is broken into four stages—introduction, growth, maturity, and
decline. This concept is used by management and by marketing professionals as a factor in
deciding when it is appropriate to increase advertising, reduce prices, expand to new markets,
or redesign packaging.
 A product life cycle is the amount of time a product goes from being introduced into the
market until it's taken off the shelves.
 There are four stages in a product's life cycle—introduction, growth, maturity, and
decline.
 The concept of product life cycle helps inform business decision-making, from pricing
and promotion to expansion or cost-cutting.
 Newer, more successful products push older ones out of the market.
How it works?
 Introduction: This phase generally includes a substantial investment in advertising and
a marketing campaign focused on making consumers aware of the product and its
benefits.
 Growth: If the product is successful, it then moves to the growth stage. This is
characterized by growing demand, an increase in production, and expansion in its
availability.
 Maturity: This is the most profitable stage, while the costs of producing and marketing
decline.
 Decline: A product takes on increased competition as other companies emulate its
success—sometimes with enhancements or lower prices. The product may lose market
share and begin its decline.
Examples
 Oldsmobile began producing cars in 1897 but the brand was killed off in 2004. Its gas-
guzzling muscle-car image lost its appeal, General Motors decided.
 Woolworth's had a store in just about every small town and city in America until it
shuttered its stores in 1997. It was the era of Walmart and other big-box stores.
 Border's bookstore chain closed down in 2011. It couldn't survive the internet age.
Absolute Advantage Theory

 Absolute advantage is when a producer can provide a good or service in greater
quantity for the same cost, or the same quantity at a lower cost, than its competitors.
 A concept developed by Adam Smith, absolute advantage can be the basis for large
gains from trade between producers of different goods with different absolute
advantages.
 By specialization, division of labor, and trade, producers with different absolute
advantages can always gain more than producing and consuming in isolation.
 Absolute advantage can be contrasted with comparative advantage, which is the ability
to produce goods and services at a lower opportunity cost.
A clear example of a nation with an absolute advantage is Saudi Arabia, The ease with which it
can reach its oil supplies, which greatly reduces the cost of extraction, is its absolute advantage
over other nations.
Mercantilism Theory
Mercantilism is an economic theory where the government seeks to regulate the economy
and trade in order to promote domestic industry – often at the expense of other countries.
Mercantilism is associated with policies which restrict imports, increase stocks of gold and
protect domestic industries.
Mercantilism reduces trade and cooperation between countries, which makes goods more
expensive and difficult to procure. For example, tropical fruits cannot be grown in western
countries such as the UK and France, so need to be imported. At the same time, it forces a
country to be self-reliant.

Heckscher-Ohlin Theory (Factor Proportions Theory)

Uploaded by

Copyright:

Available Formats

Heckscher-Ohlin Theory (Factor Proportions Theory)

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Heckscher-Ohlin Theory (Factor Proportions Theory)

Uploaded by

Copyright:

Available Formats

Heckscher-Ohlin Theory (Factor Proportions Theory)

The Heckscher-Ohlin model is an economic theory that proposes that countries export what

Porter’s Diamond Theory

What do the four factors mean?

An example where Porter’s Diamond can be used to explain a regional advantage is in

New Trade Theory

Leontief’s Paradox Theory

Product Life Cycle Theory

Absolute Advantage Theory

You might also like