The first test of the Heckscher-Ohlin theorem was performed by economists Wassily Leontief in 1953, using data for the United States from 1947.
To illustrate the importance of capital for comparative advantage, imagine a world in which all comparative advantage can be explained through differences between countries in the amount of physical capital that workers have to work with. In such a world that is described by the Heckscher-Ohlin model, named after the two Swedish economists, Eli Heckscher and Bertil Ohlin, who developed it. Ohlin won a Nobel Prize for his work in international economics. The Heckscher-Ohlin model provides a particular explanation for comparative advantage.
A model of international trade in which comparative advantage derives from differences in relative factor endowments across countries and differences in relative factor intensities across industries. Sometimes refers only to the textbook or 2x2x2 model, but more generally includes models with any numbers of factors, goods, and countries. Model was originally formulated by Heckscher (1919), fleshed out by Ohlin (1933), and refined by Samuelson (1948, 1949, 1953).
An important implication of the Heckscher-Ohlin model is that trade will tend to bring factor prices (the price of labor and the price of capital) in different countries into equality. In other words, if the comparative advantage between Korea and the United States was due only to differences in relative capital and labor abundance, then trade would tend to increase real wages in Korea and lower real wages in the United States.
In an HO model of a small open economy, however, the potential decline in the marginal productivity of capital is completely offset by a shift in the product mix toward capital-intensive products. In a closed economy, by contrast, shifts in the product mix are necessarily more limited because everything has to be sold internally. Thus, growth is more easily sustained in open economies than in closed ones.
The two-factor, two-good, two-country version of the Heckscher-Ohlin (HO) proposition states that each country exports the good that intensively uses its relatively abundant productive factor. (It also follows that in this model each country exports (embodied in goods) its relatively abundant factor and imports its relatively scarce factor.) To establish this relationship as a theorem, it is necessary to assume that in both countries there exists identical, constant returns-to-scale technology; identical, homothetic product preferences; different factor endowment ratios; perfectly competitive factor and product markets; perfectly mobility of factors domestically but complete immobility internationally; and free trade. In addition factor-intensity reversals are ruled out.
The basic insight of the Heckscher-Ohlin (HO) model is that traded commodities are really bundles of factors (land, labor, and capital). The exchange of commodities internationally is therefore indirect factor arbitrage, transferring the services of otherwise immobile factors of production from locations where these factors are abundant to locations where they are scarce. Under some circumstances, this indirect arbitrage can completely eliminate factor-price differences. Perhaps the most important implication of the HO model is that the option to sell factor services externally (through the exchange of commodities) transforms a local market for factor services into a global market. As a result, the derived demand for inputs becomes much more elastic, and also more similar across countries.
Heckscher was a Swedish economist. He is probably best known for his book "Mercantilist." Although his major interest was in studying economic history, he also developed the essentials of the factor endowment theory of international trade in a short article in Swedish in 1919. It was translated into English thirty years later.
The Heckscher-Ohlin (HO hereafter) model was first conceived by two Swedish economists, Eli Heckscher (1919) and Bertil Ohlin. Rudimentary concepts were further developed and added later by Paul Samuelson and Ronald Jones among others. There are four major components of the HO model:
Factor Price Equalization Theorem,
Rybczynski Theorem, and
Heckscher-Ohlin Trade Theorem.
The Heckscher-Ohlin model was developed at the end of a "golden age" of international trade that lasted from about 1890 until 1914, when World War I started. Those years saw dramatic improvements in transportation: the steamship and the railroad allowed for a great increase in the amount of international trade. For these reasons, there was a considerable increase in the ration of trade to GDP between 1890 and 1914. It was not surprising, then, that Heckscher and Ohlin would want to explain the large increase in trade that they had witnessed in their own lifetimes.