Heckscher-Ohlin Model Definition: Evidence and Real-World Example

What Is the Heckscher-Ohlin Model?

The Heckscher-Ohlin model is an economic theory proposing that countries export what they can most efficiently and plentifully produce. It's also referred to as the H-O model or 2x2x2 model. It's used to evaluate trade and the equilibrium of trade between two countries that have varying specialties and natural resources.

The model emphasizes the export of goods that require factors of production a country has in abundance. It also emphasizes the import of goods that a nation can't produce as efficiently. It takes the position that countries should ideally export materials and resources that they have an excess of while proportionately importing those resources they need.

The Basics of the Heckscher-Ohlin Model

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson expanded the original model through articles written in 1948, 1949, and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.

The model isn't limited to tradable commodities. It also incorporates other production factors such as labor. The costs of labor vary from one nation to another so countries with cheap labor forces should focus primarily on producing labor-intensive goods, according to the model.

Evidence Supporting the Heckscher-Ohlin Model

The Heckscher-Ohlin model appears reasonable but most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with each other and rely less heavily on trade with developing markets.

Real-World Example of the Heckscher-Ohlin Model

Certain countries have extensive oil reserves but they have very little iron ore. Other countries can easily access and store precious metals but they have little in the way of agriculture.

The Netherlands exported almost $696 million in U.S. dollars in 2021 compared to imports that year of approximately $623 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.

The Bottom Line

The Heckscher-Ohlin model emphasizes the benefits of international trade and the global benefits to everyone when each country puts the most effort into exporting resources that are domestically naturally abundant.

All countries benefit when they import the resources they naturally lack. A nation can take advantage of elastic demand when it doesn't have to rely solely on internal markets. The cost of labor increases and marginal productivity declines as more countries and emerging markets develop. Trading internationally allows countries to adjust to capital-intensive goods production that wouldn't be possible if each country only sold goods internally.