Heckscher–Ohlin model

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The standard model of the theory of inter-industry trade, named after its originators. In this model countries have the same constant-returns-to-scale production functions for each good, but different amounts of capital relative to their labour supply. In the absence of trade, goods which require large amounts of labour relative to capital would be relatively cheaper in the more labour-abundant countries, and relatively dearer in the more capital-rich countries. If trade becomes possible, countries export goods intensive in the use of their more plentiful factor, and import goods intensive in the use of their scarce factor. This tends to equate relative prices in different countries, and relative factor prices. If there were free trade and no transport costs, complete relative price and factor price equalization would result. This model does not attempt to explain intra-industry trade.

Subjects: Economics.

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