Heckscher-Ohlin Trade Model

Heckscher-Ohlin explains trade through factor endowments. Countries export goods that use their abundant factors intensively and import goods that use their scarce factors intensively.

Ohlin's 1933 book built on Heckscher's earlier insight and made factor proportions central to trade theory. Stolper and Samuelson later showed how goods prices can change factor rewards inside the model.

The model is powerful because it connects trade patterns to distribution. It is also demanding: identical technology, perfect competition, factor mobility within countries, and no trade costs are strong assumptions.

A labor-abundant country has a lower relative price of labor-intensive production before trade. Opening trade raises the relative price of the good that uses its abundant factor intensively.

Factor-price effects follow from zero-profit conditions. When the labor-intensive good's price rises, the real reward to labor rises relative to capital under the Stolper-Samuelson logic.

Trade equalizes goods prices first. Factor-price equalization requires stricter assumptions and can fail with technology gaps, transport costs, policy barriers, or factor-intensity reversals.

The model helps explain why trade creates winners and losers within countries even when national income rises.

Policy debates over tariffs, industrial policy, and worker compensation use the model's distributional logic, especially for sectors intensive in less-mobile factors.

Empirical trade patterns often require technology, scale economies, firm heterogeneity, and global value chains beyond the pure endowment story.