The Role of Heckscher-Ohlin theory in International Trade

  • Uncategorized

International trade is defined as the process by which various goodsand services are traded across the globe by different countries.International trade creates a balance in the global economy byfacilitating the transfer of goods and services and factors ofproduction from areas of a high endowment to areas of lowavailability and high demand (Negishi, &amp Negishi, 2013).

International trade to this day, has to a great extent been based onthe Heckscher-Ohlin theory, though modern economists have opposed itsapplication. Trade at the International level is based on countriesproducing in abundance, goods and services that have limitedavailable factors of production for their production and exportingsuch goods and services to a country that does not produce thosegoods and services. Across the globe, different countries are endowedwith different and unique resources, for example, one country isendowed with crude oil, and another one is endowed with fertile soilfor agriculture hence supporting the theory as a country with crudeoil will export to a country with agricultural products and importssuch agricultural products which it cannot produce (Panagariya,2013).

Heckscher-Ohlin theory is not entirely applicable in theinternational trade simply because international trade is not purelybased on the creation of even distribution of goods and servicesacross the globe. The trade today is based on factors of productionmobility such as labor and application of modern technology inproduction activities. However, countries have shifted theirproduction activities to countries endowed with high skilled labor atlower wage rates to reduce the production cost, an idea which seemsto originate from the Heckscher-Ohlin theory. The reason for this isto cut down on production cost which helps them survive thecompetition in the market. 

References

Negishi, T., &amp Negishi, T. (2013). Heckscher–Ohlin Theory (1).Advances in Japanese Business and Economics Developments ofInternational Trade Theory, 75-80.

Panagariya, A. (2013). The Comparative Advantage: The Ricardian andHeckscher–Ohlin Theories. Handbook of Trade Policy for Development,89-113.