NAME: OGONA TOJU BUWA
MATRIC NUMBER: RUN/ECO/13/4906
DEPARTMENT: ECONOMICS
COURSE CODE: ECO 303
LECTURER IN CHARGE: MR. OLABODE
DUE DATE OF SUBMISSION: 3/12/15
ASSIGNMENT: CRITICALLY EXAMINE THE THEORY OF HESCKHER OHLIN’S AND THAT OF
HARBERLER.
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NAME: OGONA TOJU BUWA
MATRIC NUMBER: RUN/ECO/13/
DEPARTMENT: ECONOMICS
COURSE CODE: ECO 303
LECTURER IN CHARGE: MR. OLABODE
DUE DATE OF SUBMISSION: 3/12/
ASSIGNMENT: CRITICALLY EXAMINE THE THEORY OF HESCKHER OHLIN’S AND THAT OF
HARBERLER.
HEC KSCHER-OHLIN THEORY
At heart, the Heckscher-Ohlin model seeks to mathematically explain how countries should
operate when resources are not distributed equally around the world. For example, some
countries have ample oil reserves but little iron ore, while other countries have access to precious
metals but not agriculture. The model goes beyond tradable commodities by also including other
factors of production, such as labor. Because global labor costs vary, countries with cheap labor
should focus on goods that are too labor-intensive in other countries.
ASSUMPTIONS OF THE THEORY
Production output is assumed to exhibit constant returns to scale: In a simple model, both countries produces two commodities. Each commodities in turn is made using two factors of production. The production of each commodities requires input from both factors of production—capital (K) and labor (L). The technologies of each commodities is assumed to exhibit constant returns to scale (CRS). CRS technologies implies that when inputs of both capital and labor is multiplied by a factor of k , the output also multiplies by a factor of k. For example, if both capital and labor inputs are doubled, output of the commodities doubled. In other terms production function of both commodities is "homogeneous of degree 1".
Both countries have identical production technology: This assumption means that producing the same output of either commodity could be done with the same level of capital and labour in either country. Actually, it would be inefficient to use the same balance in either country (because of the relative availability of either input factor) but, in principle this would be possible. Another way of saying this is that the per-capita productivity is the same in both countries in the same technology with identical amounts of capital. Countries have natural advantages in the production of various commodities in relation to one another, so this is an "unrealistic" simplification designed to highlight the effect of variable factors. This meant that the original H–O model produced an alternative explanation for free trade to Ricardo's, rather than a complementary one; in reality, both effects may occur due to differences in technology and factor abundances. Factor mobility within countries: Within countries, capital and labor can be reinvested and reemployed in order to produce different outputs. Similar to Ricardo's comparative advantage argument, this is assumed to happen without cost. If the two production technologies are the arable industry and the fishing industry it is assumed that farmers can shift to work as fishermen with no cost and vice versa.
It is further assumed that capital can shift easily into either technology, so that the industrial mix can change without adjustment costs between the two types of production. For instance, if the two industries are farming and fishing it is assumed that farms can be sold to pay for the construction of fishing boats with no transaction costs.
The technologies used to produce the two commodities differ:
The CRS production functions must differ to make trade worthwhile in this model. For instance if the functions are Cobb–Douglas technologies the parameters applied to the inputs must vary. An example would be:
Arable industry: Fishing industry: Where A is the output in arable production, F is the output in fish production, and K , L are capital and labor in both cases.