The Heckscher-Ohlin model, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics, builds on David Ricardo's theory of comparative advantage by explaining in which goods any given country should specialize production. According to Hecksher and Ohlin, relative endowments of the factors of production (land, labour, and capital) determine a country's comparative advantage. Countries have comparative advantage in those goods for which the required factors of production are abundant. This is because the prices of goods are ultimately determined by the prices of their inputs. Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.

For example, a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example. Since capital and land are abundant, their prices will be low. Those low prices will insure that the price of the grain that they are used to produce will also be low - and thus attractive for both local consumption and export. Labour-intensive goods on the other hand will be very expensive to produce since labour is scarce and its price is high. Therefore, the country is better off importing those goods. As econometrics estimations have shown the model to perform poorly several adjustments have been suggested, most importantly the assumption that technology is not the same everywhere.

See Also

• International trade
• Free Trade