Heckscher—Ohlin—Samuelson Model

Abstract

Eli Heckscher and Bertil Ohlin were the first to explore the role of factor endowments as the basis for trade.¹ They laid the groundwork for the developments that substantially changed the nineteenth- and early twentieth-century trade theory. This theory was closely based on the Ricardian explanation of trade, which suffered from some weak points. The more serious weaknesses of the Ricardian model are related to (1) its assumption of a single factor of production and the resulting non-diminishing marginal returns, and (2) the fact that it does not attempt to explain what is behind differences in comparative costs. For example, Heckscher states that ‘[I]t is a puzzle that until now so little attention has been paid to this basic issue [that is, causes of differences in comparative costs] in Ricardo’s theory of foreign trade — a theory that has yet to be successfully challenged’ (Heckscher and Ohlin, 1991, p. 47). Then he states that ‘[T]he prerequisites for initiating international trade may thus be summarised as different relative scarcity, that is, different relative prices of the factors of production in the exchanging countries, as well as different proportions between the factors of production in different commodities (Heckscher and Ohlin, 1991, p. 48, emphasis in the original).