Factor Endowments: The Heckscher–Ohlin Model

Ricardo explained trade through differences in productivity, but why do those differences exist? Swedish economists Eli Heckscher and Bertil Ohlin argued that countries differ in their endowments of factors of production: land, labor and capital. A country rich in labor relative to capital will have a comparative advantage in labor-intensive goods like clothing, while a capital-rich country will export machinery.

The model also predicts that trade affects incomes inside countries: it raises returns to the abundant factor and lowers returns to the scarce one, an idea formalized by Stolper and Samuelson in 1941. This helps explain why low-skilled workers in rich countries often oppose trade liberalization while owners of capital support it. Yet when Wassily Leontief tested the model in 1953, he found US exports were less capital-intensive than its imports, the 'Leontief paradox', prompting economists to consider skills, technology and other factors.