The Heckscher-Ohlin theory culminates in what is now generally known as the Heckscher-Ohlin theorem (HOT) of the pattern of international trade: a...
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The Heckscher-Ohlin theory culminates in what is now generally known as the Heckscher-Ohlin theorem

 (HOT) of the pattern of international trade: a country exports those goods whose production is intensive in the country's relatively abundant factor and imports other goods that use intensively the country's relatively scarce factor.

Assume that only two countries, Home country A and foreign market or foreign country B, exist with the following resources endowments:

  • Two goods: Carpet and car
  • Two factors of production: K and L
  • Mix of Labor and Capital Used varies across given goods
  • Supply of labor and capital in each country is constant and varies across countries
  • Both Labor and Capital can move across sectors equalizing their returns-wages and rental rate

Production Possibilities:

  • Fixed mix of Capital and Labor in each sector:
  • To produce one carpet, need 1 K and 8 Labor
  • To produce one Car, need 6 K and 2 labor
  • Total size of Labor available in A country is K=300 units and L=15000 hours of labor.
  • Total size of labor available in B foreign country is K= 15500 and L= 1000 hours of labor

Required:

  1. which industry would you expect to be relatively labor-abundant, and which capital abundant? why?
  2. which industry would you expect to be relatively labor-intensive and which is capital intensive? why?
  3. Critically analyze the HO Model and its importance for making strategic decisions?

Answered by Expert Tutors

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