Heckscher-Ohlin Theorem in a Nutshell

1. Countries differ in factor enrollments. Relative factor endorsement is the source of comparative advantage.

2. Some countries are labour abundant and capital source. Some are capital abundant and labour source.

3. Though, comparative cost difference is the basic of international trade, its root causes lies in:

(i) The differences in relative prices of products which is due to differences in factor endowments; and

(ii) Differences in factor proportions in the input set/production function of different products. Some products are labour-intensive. Some products are capital-intensive.

4. A country will export products that use intensively its relatively abundant factors of production. Its imports will consists of those products that use relatively scarce factors of production.

5. Labour-abundant country will export labour-intensive products and import capital-intensive products. 6.> Capital-abundant country will export capital-intensive products and import labour-intensive products.

6. In short, trade occurs because of factor endowment differentials among different countries and factor input intensity differentials in the production function of different products.

7. For example, owing to abundant land availability well suited to primary goods, Canada exports products such as when, paper, wood pulp and potash to an extent than do most industrialised nation.

Switzerland has land scarcity, but possesses capital and skilled labour well suited for the production of watches and scientific instruments. Swiss has, therefore, specialised in these goods and exports them. Owing to land scarcity it imports raw materials and foodstuffs. Likewise, Hong Kong and Taiwan possessing cheap labour have specialised in and exporting labor intensive products such as garments, low-priced shoes and small appliances. Sri Lanka exports tea because the land is well suited in producing tea.