Heckscher-Ohlin-Samuelson Model

BIBLIOGRAPHY

The Heckscher-Ohlin-Samuelson model attempts to explain the composition of trade between countries and the implications of trade for income distribution within the countries. The seminal work was presented in a 1919 Swedish paper (English translation, 1950) by Eli F. Heckscher (1879–1952) and a 1933 book by his student Bertil Ohlin (1899–1979). In later articles (especially 1949 and 1953–1954), Paul A. Samuelson added substantial rigor to the analysis and expanded the original Heckscher-Ohlin model. The analysis has been subjected to countless empirical tests to determine its applicability to actual trading patterns.

Building upon the earlier classical (David Ricardo [1772–1823]) comparative advantage trade model, the Heckscher-Ohlin-Samuelson model (hereafter H-O-S) goes behind comparative advantage to ask, “What determines comparative advantage in the first place?” The HO-S answer is found by utilizing Heckscher’s observations that (1) countries differ in their relative endowments of the factors of production, and (2) production processes for different goods employ different relative intensities of the factors. Suppose a situation with only two factors of production (e.g., labor and capital, where “capital” refers to plant and equipment used to produce output), two goods (e.g., clothing and automobiles), and two countries (e.g., A and B). If labor is more abundant (in greater supply) relative to capital in country A than in country B, then, other things being equal, labor will be relatively cheaper in A than in B. That is, the wage rate in A (wA) divided by the return to capital in A (rA) will be less than the ratio of the corresponding values in B [(wB/rB)]. If clothing production is specified to use more labor relative to capital than automobile production, then, because labor is cheaper in A than in B, country A will be able to produce clothing at a relatively lower cost than country B. By parallel reasoning, with abundant capital in B and capital-intensive automobile production, autos will be relatively cheaper in B than in A. Hence, the trade pattern is that A exports clothing to B, and B exports automobiles to A. This is the Heckscher-Ohlin theorem: a country exports goods that are produced relatively intensively by the country’s relatively abundant factor of production, and imports goods that are produced relatively intensively by the country’s relatively scarce factor of production. The formal analysis contains many underlying assumptions, but this trade pattern conclusion is straightforward and accords with common sense.

Besides predicting trade patterns theoretically, H-O-S also yields implications of trade for factor prices and income distribution in the countries. As trade begins in the above example, there will be greater relative demand for A’s abundant factor (labor) in order to produce the new clothing exports; there will be less relative demand for the scarce factor (capital) due to the reduced need for domestic auto production because of the auto imports. These changes mean that wA will rise and rA will fall, so (wA/rA) rises. At the same time, wB will fall and rB will rise [so (wB/rB) falls] as country B demands relatively more capital to produce auto exports and relatively less labor to produce clothing. These factor price changes continue until an equilibrium is reached where there is no further upward or downward pressure on any factor return. Before trade, (wA/rA) < (wB/rB) but, with trade, the rise in (wA/rA) and the fall in (wB/rB) cause these ratios to converge. In equilibrium, (wA/rA) = (wB/rB). Given the assumptions of the model, not only relative factor prices but also absolute factor prices across countries are equalized, meaning that wA = wB and rA = rB. If equality is not reached, trade continues to expand until it is. This powerful implication of trade for factor prices is known as the factor-price equalization theorem. While such equalization clearly does not happen in practice, it is the convergence or the tendency toward equalization that is important.

Even more powerful in H-O-S is the extension of the factor-price analysis to the result known as the Stolper-Samuelson theorem —a country’s scarce factor of production loses real income from trade (and gains from restrictions on trade) and the country’s abundant factor of production gains from trade (and loses from trade restrictions). These outcomes occur because of the changing demands stated above. Hence, trade policy becomes intertwined with politics—in country A in our example, labor favors trade because labor’s real income thereby increases, while owners of capital lose and would oppose trade.

Finally, a fourth major theorem that arises from HO-S is the Rybczynski theorem. This theorem states that an increase in the supply of a factor of production in a country (say, labor) leads to an increase in output of the good that uses that factor intensively (clothing) and to a decrease in production of the other good (autos). Thus, H-O-S has a growth dimension with implications for future output and future trade patterns.

Empirical testing of H-O-S has centered around examining whether actual trade patterns correspond to the model’s predicted patterns. An early test (1953) by Wassily Leontief (1906–1999) surprised economists because the results suggested that the relatively capital-abundant United States was exporting labor-intensive goods and importing capital-intensive goods. This “paradox” led to much later testing that included a greater number of factors (e.g., by dividing labor into different skill categories) and different testing techniques. Some studies, such as those by Daniel Trefler (1995) for thirty-three countries and nine factors and by Harry P. Bowen, Edward E. Leamer, and Leo Sveikauskas (1987) for twenty-seven countries and twelve factors, found limited verification of the predicted patterns. When adjustments are made in the literature for elements outside the model, results get better for H-O-S, but much trade still goes “unexplained.”

Another aspect of H-O-S that has been empirically investigated concerns the Stolper-Samuelson theorem, in that economists have sought to determine whether, particularly in the United States, relatively unskilled labor (a scarce factor in the United States) has lost real income because of increased trade. This research, done in the context of the observed increased inequality in income distribution in the late twentieth century, is generally regarded as having found some small effect in the expected direction but also as having found that the growing inequality was due more importantly to the nature of technological change. Empirical work as well as other considerations regarding H-O-S have led to a recognition that the theoretical model, while widely employed, can be criticized for lack of attention to “real-world” characteristics such as differing production functions across countries, economies of scale, and product differentiation.

SEE ALSO Absolute and Comparative Advantage; Rybczynski Theorem; Stolper-Samuelson Theorem; Tariffs

BIBLIOGRAPHY

Bowen, Harry P., Edward E. Leamer, and Leo Sveikauskas. 1987. Multicountry, Multifactor Tests of the Factor Abundance Theory. American Economic Review 77 (5): 791–809.

Heckscher, Eli F. 1950. The Effect of Foreign Trade on the Distribution of Income. In Readings in the Theory of International Trade, eds. Howard S. Ellis and Lloyd A. Metzler for the American Economic Association, 272–300. Homewood, IL: Irwin. Slightly abridged version translated from Ekonomisk Tidskrift (1919).

Leontief, Wassily. 1953. Domestic Production and Foreign Trade: The American Capital Position Re-examined. Proceedings of the American Philosophical Society 97 (4):332–349.

Ohlin, Bertil. 1933. Interregional and International Trade. Cambridge, MA: Harvard University Press.

Samuelson, Paul A. 1949. International Factor-Price Equalisation Once Again. Economic Journal 59 (234): 181–197.

Samuelson, Paul A. 1953–1954. Prices of Goods and Factors in General Equilibrium. Review of Economic Studies 21 (1):1–20.

Stolper, Wolfgang F., and Paul A. Samuelson. 1941–1942. Protection and Real Wages. Review of Economic Studies 9 (1): 58–73.

Trefler, Daniel. 1995. The Case of the Missing Trade and Other Mysteries. American Economic Review 85 (5): 1029–1046.

Dennis R. Appleyard