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 Charles van Marrewijk
Heckscher-Ohlin; 1
To demonstrate the Heckscher-Ohlin (HO) result we will use some of
the earlier results, in particular Factor Price Equalization
(FPE) and the Rybczynski (Ryb) theorem. It is the only of the four
basic results that requires identical homothetic preferences
First, note that if 2 countries start to trade this equalizes the prices of
the 2 final goods in the 2 countries.
According to FPE under identical technologies and CRS this
equalizes the rewards for the 2 inputs, the wage w for labor and the
rental r for capital, in the 2 countries.
That, in turn, implies that the capital-intensity with which the 2 goods
X and Y are produced are identical in the 2 countries
According to Ryb. the country with (rel.) more capital produces (rel.)
more of the (rel.) capital-intensive good; say country A has more
capital, less labor and good X is (rel.) more capital-intensive
 Charles van Marrewijk
Heckscher-Ohlin; 2
Here is the green ppf of country B, it produces at point Bp
Country A has more capital and less labor, so we can
trace first the Capital and then the Labor Ryb-line to
arrive at country A’s production point Ap
Y
(lab
int)
B
Bp
Or we could take the other
route and first trace the Labor
more capital and then the Capital Ryb-line
less labor
less labor
more capital
0
The end result is
obviously the same.
Ap
X (cap int)
 Charles van Marrewijk
Study Guide Figure 8 Heckscher-Ohlin; 3
Through country A’s production point Ap we can also draw a ppf.
Y
At the int. eq. trade prices for goods X and Y the income
(lab
line is tangent for country A at Ap and for country B at Bp
int)
This is where the assumption of identical
B
Bp
homothetic preferences comes in
Both countries consume
somewhere along their own
income line, however the
ratio with which goods X and
Y are consumed is the same
Ap
A
0
X (cap int)
 Charles van Marrewijk
Heckscher-Ohlin; 4
If we know country B’s consumption point Bc along its income
line, extending a line from the origin through Bc determines
Y
(lab country A’s consumption point Ac along its income line.
int)
Naturally, to be an international equilibrium
the trade triangles have to match (reciprocally)
Bp
Ac
This can only occur if the
consumption ratio is in
between Ap and Bp (as drawn)
Bc
Ap
0
X (cap int)
 Charles van Marrewijk
Y
(lab
int)
Heckscher-Ohlin; 5
Since the consumption ratio is in between Ap and Bp country
B, which has relatively more labor than country A, exports
good Y, which uses labor relatively intensively.
The reverse holds for country A (it has
rel. more capital and exports good X
which uses capital rel. intensively).
Bp
Ac
Bc
Ap
0
According to the HO
result a country exports
the good which makes
intensive use of its
abundant factor of
production
X (cap int)