Factor Proportions Assumptions

The Heckscher-Ohlin factor proportions analysis exposing the basis of international trade rests on a number of explicit and implicit assumptions which are as follows:

(1) A “double” model system is considered, in which there are two countries, two commodities and two factors of production, labour and capital.

(2) The relative endowments of the two factors (labor and capital) are disproportionate in the two countries quantitatively, thus, factor supplies are differently fixed. But qualitatively each factor is homogeneous in both countries.

(3) Factors of production are perfectly mobile within their respective countries but immobile between countries. 

(4) There is perfect competition in all markets – factor as well as commodity markets – and full employment of resources in both the countries.

(5) The producing functions are different for different goods but the same for each good in two countries.

(6) The production functions for different goods are such as can be distinguished by intensity of factor inputs. Thus, goods can be classified in terms of their factor intensity as labour-intensive and capital-intensive goods.

(7) In both countries, techniques of producing identical goods are the same. Thus, the production functions are homogeneous in two countries, implying that if one good is relatively labour intensive in one country, it is relatively labour-intensive in the other country too, irrespective of the relative factor prices (the price of labour relative to the price of capital) in the country.

(8) Each production function is subjected to the constant returns to scale, i.e. a given proportion of factor input results in the same proportionate output.

(9) Trade between two countries is free and costless. There are no tariffs or other barriers and no transport or similar costs.

(10) Consumer preferences, thus demand for goods, are identical in both the countries.

All such assumptions have been made in order to specify but at the same time, minimize the analytical differences between the two countries.

Given these assumptions, Ohlin’s thesis contends that, a country exports goods which use relatively a greater proportion of its relatively abundant thus cheap factors. It is implied that trade occurs because there are differences in relative commodity prices caused by differences in relative factor prices (thus a comparative advantage) as a result of differences in the factor endowments between the countries.

The “relative factor abundance” in the thesis has two conceptions: (i) the price criterion of relative factor abundance; and (ii) the physical criterion of relative factor abundance.

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