The Hecksher-Ohlin theory is a theory of a long-term general balance where the two factors ofproduction taken into account, namely work and capital, are interchangeable among the fields ofactivity. This theory considers that the relative advantage of each country depends on thecombination of the production factors (capital, work, nature) which ensure a proportion which iscomparatively or relatively higher than the more abundant factor and, therefore which may allow aproduction cost, which is relatively or comparatively low of the merchandise to be exported

Mihaela-Carmen MUNTEAN

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THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          ANALYSIS OF THE HECKSHER-OHLIN MODELMihaela-Carmen MUNTEANUniversity “Dunarea de Jos” Galati,Department of Economicse-mail: mihaela_c_muntean@yahoo.comThe Hecksher-Ohlin theory is a theory of a long-term general balance where the two factors of production taken into account, namely work and capital, are interchangeable among the fields of activity. This theory  considers that  the relative advantage  of each country  depends on the combination of the production factors (capital, work, nature) which ensure a proportion which is comparatively or relatively higher than the more abundant factor and, therefore which may allow a production cost, which is relatively or comparatively low of the merchandise to be exported.Keywords: Hecksher-Ohlin theory,  relative advantage, comparative advantage, work, capitalIntroductionThe Hecksher-Ohlin theory is a theory of a long-term general balance where the two factors of production taken into account, namely work and capital, are interchangeable among the fields of activity. This theory tackles the theory of the work value and succeeds in making the best of the great contributions   of   the   second   half   of   the   18th century,   among   which   Alfred   Marshal’s contribution is worth mentioning.Ohlin insists on the reasons that made him reject the theory of work value and chose the neoclassic theory of prices as a starting point in the analysis of   the   international   trade.   He   expresses   his intention to formulate a theory of the international trade which will comply with the theory of mutual interdependence   among   prices   and   thus independent of the classical theory of the value based on work.Hecksher   and   Ohlin   mainly   show   that   the essential elements of the international trade are the following:· production   factors   of   the   national economy are different from those of the world economy;· the   different   way   in   which   the production factors are involved in the production of goods which constitute the object of the international trade.Starting from these essential elements, the theory designed by Hecksher and Ohlin suggests that nations should specialize in the manufacturing of those goods that make  use intensively of the factors that they own abundantly. Thus, Ohlin concludes that every region is better endowed to produce goods that require a better proportion of its relatively abundant factors. On the other hand, it is unsuited to produce goods that require a greater   proportion   of   the   existing   factors   in smaller quantities or factors that are not available at all.Hecksher and Ohlin’s theory does not give up the principle   of   the   comparative   advantage, formulated   by   the   classical   theory   of   the international trade. Starting from the marginal principle of the end-using whose size is inversely proportional to the abundance of the intermediary goods used or directly proportional to the their scarcity, Hecksher and Ohlin’s theory considers that   the   relative   advantage   of   each   country depends on the combination of the production factors (capital, work, nature) which ensure a proportion which is comparatively or relatively higher   than   the   more   abundant   factor   and, therefore which may allow a production cost, which is relatively or comparatively low of the merchandise to be exported.In order to exemplify this idea, Ohlin mentions that Australia owns more agricultural land but less This paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 33THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          work force, less capital and less mines than Great Britain. Consequently, Australia is better adapted to the manufacturing of goods which require a greater quantity of agricultural land while Great Britain has the advantage of producing goods which require a considerable quantity of other factors. If both countries would produce the total amount   of   commodities   which   are   required, without   any   external   interference,   then   the agricultural products would be cheaper than in Australia.   However,   the   manufactured   goods would  be relatively expensive  while in  Great Britain it would be the opposite, where, due to the limited production of the land, every acre should be cultivated intensively, requiring hard work and a lot of capital to produce the necessary quantity of food. To the example provided by Ohlin we might add some other examples which are specific nowadays.   Thus,   this   theory   provides   an explanation regarding the fact that on one hand, countries like United States, Japan, the European Union export automobiles, planes and other goods requiring a large amount of capital. On the other hand, countries like India, China, Taiwan export fabrics,   shoes   and   other   merchandise   which require the work force intensively.As a result the Hecksher-Ohlin theory provides an explanation   regarding   the   way   in   which   the comparative advantage is constituted. Thus, from the two authors’ point of view, the comparative advantages are due to the endowment differences regarding the production factors of the national economies involved in the international trade.The   hypotheses,   on   which   the   Hecksher   and Ohlin’s theory relies on, are the following: · there are no transport expenses or any other barriers or hindrances in the international trade; · there is a perfect competition on the commodity market as well as on the production factors market; · all   production   functions   yield   a constant output on the scale; · work   and   capital   are   perfectly interchangeable among the industrial sectors within the same country but perfectly unchangeable among other countries.Description of the modelWe are going to analyze the Hecksher and Ohlin model  of a world economy made up of two national economies: country  a  and country  b, which produce two products: B1  and B2. The production   factors   used   to   manufacture   these products  are  work    (L)  and  capital  (K).  We assume that the B1 product is intensive in the work factor. Likewise we assume that country  a  is abundant in the work production factor and the country  b  is   abundant   regarding   the   capital production factor. If we use L1 and K1 to refer to the work and capital supplies existing on the economic level of country a and with L2 and K2 the work and capital supplies existing on the economic   level   of   country  b,   the   following inequality results:L1/K1 > L2/K2The above inequality shows that the abundance regarding the production factors is defined in relative terms but not in absolute ones. Thus, if we define the abundance in relative terms, neither of the   two   economies   can   be   abundant   in   both factors, although in absolute terms one of them might be.The   consumers   of   the   two   economies   have identical preferences and as a result, the relative demand curves are identical to those of the two products provided that we have the same relative prices for B1 and B2. To simplify the analysis we assume that the two economies own the same manufacturing technology of the two products. We shall make the following notations:a1,1 = the number of working hours from the work factor required to produce a unit of the B1 producta1,2 = the number of working hours from the work factor required to produce a unit of B2 producta2,1  = number of units from the capital factor required to produce a unit of the B1 productThis paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 34THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          a2,2  = number of units from the capital factor required to produce a unit of the B2 productThe hypothesis according to which the production of the B1 product is intensive in the capital factor and the production of the B2 product is intensive in   the   land   factor   can   be   expressed   by   the following inequality:a2,1/a1,1 > a2,2/a1,2which is equivalent to the following:a2,1/a2,2 > a1,1/a1,2The two economies  from the world economy cannot use more resources than those available. If the economy of country a produces Q1,1 units of the B1 product and Q1,2 units of the B2 product, then it should use a1,1*Q1,1+a1,2*Q1,2 working hours and  a2,1*Q1,1+a2,2*Q1,1  units   of   the   capital production factor. However, the amount of work used should not exceed the available offer L1, which is equivalent with the following inequality:a1,1*Q1,1 + a1,2*Q1,2 = L1Secondly,   the   total   amount   of   the   capital production   factor   cannot   exceed   the   available offer K1:a2,1*Q1,1 + a2,2*Q1,2 = K1For   the   economy   of   country  b,   under   the circumstances in which Q2,1 units of the product are   manufactured,   the   following   inequalities result:a1,1*Q2,1 + a1,2*Q2,2 ≤ L2a2,1*Q2,1 + a2,2*Q2,2 ≤ K2The inequalities can be rewritten as follows:Q1,2 ≤ L1/a1,2 – (a1,1/a1,2)*Q1,1Q1,2 ≤ K1/a2,2 – (a2,1/a2,2)*Q1,1Q2,2 ≤ L2/a1,2 – (a1,1/a1,2)*Q2,1Q2,2 ≤ K2/a2,2 – (a2,1/a2,2)*Q2,1The functions of the production possibilities for the economies of the two countries,  a and b are presented in figure 1.Figure 1 shows that the limited work and capital supply constrain the production possibilities of the two   countries.   Since   the   B1  product   is   more intensive in the capital factor than B2 product, the line which characterizes the capital constraint is more inclined than the line that characterizes the work factor constraint.The thickened lines from figure 1 describe the production possibilities of the two economies. If the two economies produce a quantity, which is bigger than the B1 product, aspect described by M1 and   N1,   then   the   frontier   of   the   production possibility is identical with the constraint of the work factor. If, on the other hand, the M2 and N2 economies produce a larger quantity of B1 product as compared to the B2 product (see M2 and N2) then the frontier of the production possibilities is determined   by   the   constraint   of   the   capital production factor. The type of constraint, which determines the frontier of production possibilities, depends on the combination between B1 and B2 products accomplished by every economy.Figure 1: The functions of the production possibilities for the economies of country a and country bThis paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 35M1M2Q1,2K1/a2,2L1/a1,2L1/a1,1 K1/a2,1 Q1,1N1N2Q2,2K2/a2,2L2/a1,2L2/a1,1 K2/a2,1 Q2,1THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          Analysis of the effects of the international tradeTo analyze the effects of the international trade on the economies of country  a  and country  b  we shall make the following notations:p1,1 = the unit price of the B1 product on the economic level of country a p1,2 = the unit price of the B2 product on the economic level of country bw1 = the wage for the working hour on the economic level of country a pr1 = the profit due to the use of a unit from the capital factor on the economic level of country a p2,1  = the unit price of the B1 product on the economic level of country a p2,2 = the unit price of the B2 product on the economic level of country bw2 = the wage for the working hour on the economic level of country bpr2 = the profit due to the use of a unit from the capital factor on the economic level of country bThe perfect competition existing in the industry of B1  and   B2  products   determines   the   complete elimination of the monopoly profit, which means that the price of any good or product is equal to its production cost. Thus on the level of the country a economy we have the following inequalities:p1,1 = a1,1*w1 + a2,1*pr1p1,2 = a1,2*w1 + a2,2*pr1and for country b:p2,1 = a1,1*w2 + a2,1*pr2p2,2 = a1,2*w2 + a2,2*pr2In figure 2 there are described the four equations presented above. Since the B1  product is more intensive in the production capital factor than the B2 product, the following relation results: a2,1/a1,1 > a2,2/a1,2  which   implies   the   fact   that   right   line corresponding to the B1 product is more inclined than the one corresponding to the B2 product.The economies of the two countries will produce two products: B1 and B2 providing that the price is equal to the cost in both industrial branches. This equality is achieved for the two products in E1 where w1=w*1 şi pr1=pr*1 and E2 where w2=w*2 şi pr2=pr*2. Figure 2 shows that we can determine the price of the production factors when we know the price of the products. Likewise, when the price of products changes, the price of the production factors will change as well.Figure 2: The determining of the production pricesWhen the international trade will be conducted within the world economy, then the phenomenon of convergence of the relative prices will be recorded. This means that the relative price of the B1 product becomes equal in the two economies. Under the circumstances in which the economy of country a is relatively abundant in capital factor and   the   economy   of   country  b  is   relatively abundant in the work factor, the B1  product is more intensive in the capital factor and the B2 product is more intensive in the work factor then, on the one hand the economy of country a will have a better production of the B1  product as compared with the B2 product. On the other hand, This paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 36E1Profit, pr1p1/a2,1p2/a2,2Wage, w1p1/a1,1 p2/a1,2pr*1w*1pr*2 E2Profit, pr2Wage, w2w*2THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          the economy of country b will produce less of B1 as compared with the B2 product. The curve of the relative supply for the B1  product of country  a economy will be situated on the right side of the curve of the economy of country b.The curve of the O1 relative supply of the country a economy and the curve of the O1 relative supply of the country  b  are presented in figure 3. The curve of the C relative supply is the same for both economies. Under the circumstances of autarchy the balance of the country a economy will be in D1  point   and   the   balance   of   the   country  b economy will be in D2. In the absence of the international trade, the relative price of the B1 product is lower in the country a economy than in country b.Figure 3: The balance before and after the conducting of the international tradeWhen the economies of the two countries are involved   in   commercial   relations,   the   relative prices become convergent. The relative price of the B1 product will increase on the economic level of country a while the same price will decrease on the economic level of country b. The new relative price of the B1 product will stabilize somewhere between the relative prices existing before the international trade. The new point of balance will be D3 as shown in figure 3. Within the economy of country a, the increase of the relative price of the B1  product determines  an increase of the relative   production   of   this   product,   which   is simultaneous   with   a   relative   decrease   of   its consumption. Thus, the economy of country  a becomes   the   exporter   of   B1  products   and   an importer of B2 products. On the other hand, the decreasing of the relative price of the B1 product in the country b economy has as a consequence the   changing   of   this   economy   into   one   that imports B1 products and exports B2 products. In conclusion,   the   national   economies   have   the tendency of exporting products whose production is intensive in the abundant production factors.Conclusions The changing of the relative prices has a great impact on the income corresponding to the work and capital production factors. On the economic level of the country a, an increase of the relative price of the B1 product determines an increase of the purchasing power for the capital factor in terms of the two products. At the same time it determines a decrease of the purchasing power for the work factor in terms of the two products.On   the   economic   level   of   the   country  b,   a decrease of the relative price of the B1  product generates a decrease of the purchasing power for the capital factor in terms of the two products, which is simultaneous with an increase of the This paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 37Relative price of B1Relative supply of B1D2D3D1CO2O1THE ANNALS OF "DUN    Ã    REA DE JOS" UNIVERSITY OF GALAŢI           FASCICLE I - 2005,     Economics and Applied Informatics, Year XI, ISSN 1584-0409          purchasing power for the work factor in terms of the two products.The resource in which the economy is relatively abundant (which in our case is capital for the country  a  economy   and   work   for   country  b economy) – represents the abundant production factor   which   cannot   be   found   in   a   relative abundance.   Work   is   the   rare   factor   for   the economy of country a whereas capital is the rare factor for the economy of country b.The   general   conclusion   that   can   be   drawn regarding the effect of the international  trade concerning   the   income   distribution   might   be couched in the following terms: the owners of the abundant   production   factors   of   the   national economy will benefit from the international trade while the owners of the rare factors will lose.References:1. Heckcher, E.F.,  Readings in the Theory of International Trade, Ellis H.S., Metzler L.A. (eds.), Irwin, Homewood, 19502. Ohlin,   B.,  Interregional   and   International Trade, Harvard University Press, Cambridge, 19333. Puşcaciu   V.,   Puşcaciu   Fl.,  Comerţ internaţional, Editura Didactică şi Pedagogică R.A., Bucureşti, 20044. Sută   N.,  Comerţ   internaţional   şi   politici comerciale contemporane, Editura Eficient, Bucureşti, 2000.5. Bhagwati J., Lectures on International Trade, Second Edition, MIT Press, Cambridge, M.A., 1998.6. Kenen P.B.,  The International Economy, Ed. Prentice Hall Inc., 1985.7. Krugman   P.,   Obstfeld   M.,  International Economic – Theory and Policy, Ed. Harper-Rollins, 2000.This paper was recommended for publication by Prof. Florin Dan PUŞCACIU, PhD. 38

Annals of Dunarea de Jos University of Galati Fascicle I Economics and Applied Informatics

ANALYSIS OF THE HECKSHER-OHLIN MODEL

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ANALYSIS OF THE HECKSHER-OHLIN MODEL

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