Heckscher-Ohlin theory

Heckscher-Ohlin theory, in economics, a theory of comparative advantage in international trade according to which countries in which capital is relatively plentiful and labour relatively scarce will tend to export capital-intensive products and import labour-intensive products, while countries in which labour is relatively plentiful and capital relatively scarce will tend to export labour-intensive products and import capital-intensive products. The theory was developed by the Swedish economist Bertil Ohlin (1899–1979) on the basis of work by his teacher the Swedish economist Eli Filip Heckscher (1879–1952). For his work on the theory, Ohlin was awarded the Nobel Prize for Economics (the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) in 1977.

Some countries are relatively well-endowed with capital: the typical worker has plenty of machinery and equipment to assist with the work. In such countries, wage rates generally are high; as a result, the costs of producing labour-intensive goods—such as textiles, sporting goods, and simple consumer electronics—tend to be more expensive than in countries with plentiful labour and low wage rates. On the other hand, goods requiring much capital and only a little labour (automobiles and chemicals, for example) tend to be relatively inexpensive in countries with plentiful and cheap capital. Thus, countries with abundant capital should generally be able to produce capital-intensive goods relatively inexpensively, exporting them in order to pay for imports of labour-intensive goods.

In the Heckscher-Ohlin theory, it is not the absolute amount of capital that is important; rather, it is the amount of capital per worker. A small country like Luxembourg has much less capital in total than India, but Luxembourg has more capital per worker. Accordingly, the Heckscher-Ohlin theory predicts that Luxembourg will export capital-intensive products to India and import labour-intensive products in return.

Despite its plausibility, the Heckscher-Ohlin theory is frequently at variance with the actual patterns of international trade. One early study of the Heckscher-Ohlin theory was carried out by Wassily Leontief, a Russian-born U.S. economist. Leontief observed that the United States was relatively well-endowed with capital. According to the theory, therefore, the United States should export capital-intensive goods and import labour-intensive ones. He found that the opposite was in fact the case: U.S. exports are generally more labour-intensive than the types of products that the United States imports. Because his findings were the opposite of those predicted by the theory, they are known as the Leontief Paradox.