The Heckscher-Ohlin-Samuelson model of international trade is a development of an extension of a previous model on international trade. The original model, The Heckscher-Ohlin model was initially developed and published in 1933 by Eli Heckscher and Bertil Ohlin. The fundamental principle of the model is that one country’s comparative advantage over another is determined by their relative possession of the factors of production. According to Cole & Elliot (2003) a country’s total exports “are expressed as a function of factor endowments” (p.
1165). Basically countries are more abundant in a particular factor of production (land, labor and capital) that they have available to them, relative to other countries. A country will therefore discriminate in trading those commodities that employ the dominant factor of production while importing those commodities that utilize the factors with which the country is least endowed. Contributions made by a number of researchers including Paul Samuelson and Jaroslav Vanek have led to a number of expansions and improvements on this model.
The theory put forward by Samuelson in the Heckscher-Ohlin-Samuelson (HOS) model, suggests that a different products require different factors of production to different proportions. It also theorizes that countries possess factors of production to varying proportions (Cole & Elliot, 2003, p. 1166). Sachs & Shatz (1996) indicate that the most important use of the HOS model is in describing how trade is linked to wages (p. 234). The model suggests that changes in the price of exports will directly affect the rate of factor of production that is used to produce them.
It goes to say that if there is a change in the price of goods that are primarily labor-intensive then the cost of labor would also be affected. The Heckscher-Ohlin-Samuelson (HOS) theory of international trade suggests that a country should practice, on a microeconomic level, the shift of factors of production from between and among industries based on the demands at any given time. They also suggest that such adaptation and shifting will prove to be more beneficial than costly to an economy as they can focus resources in priority areas (Gramm, 2004, p.
147). The overall message of the model is that, in order to ensure sustainable local and international markets, countries often have to specialize in goods which they can produce and export at a cost relatively cheaply and import those goods which are more costly for them to produce locally. Of course this presupposes that countries are willing to open their markets and permit international producers entering their markets with goods that have been produced much cheaper than if they were produced locally.
In an autarkic system that is very hostile towards international trade relations, a country may find that it is not using up its resources as well as it should, spending high rates to produce goods for which it has scare supplies in the factors of production (Ishikawa, 1996). In some developing countries governments have found it easier to market labor-intensive goods and have had to depend heavily on overseas suppliers for more capital-intensive products. The type of trade suggested in the HOS model allows a country to focus on what it does best and thereby gain its comparative advantage in that area.
Helpman & Razin (2001) agree that it is more costly to close off an economy to international forces than to trade openly and freely. Capital returns gained from exporting specialized goods and importing more costly items can further function as fuels in the country’s economy to either expand their dominant factor of production or develop the areas in which they were previously deficient. Critically evaluate the empirical success of the Heckscher-Ohlin-Samuelson model of international trade.
A number of researchers have created models that have tested the practicality and predictive capacity of the Heckscher-Ohlin-Samuelson model of international trade. Neary (1980) in his analysis of the ability of the H-O-S model to respond to unstable market phenomena acknowledged that certain phenomena within an economic are unpredictable and unstable and therefore could result in distortions in the factors of production. He highlights that even though some critics are skeptical of the ability of the model to predict and to respond to these changes, the H-O-S model still stands up against those supposed paradoxes.
Employing Samuelson’s Correspondence Principle, Neary demonstrates the continuing relevance and furtiveness of the model concluding that even where factors of production are distorted due to unpredictable market forces, they are not significant enough to nullify the predictions of the H-O-S mode. He argues therefore that “these paradoxes can effectively be ignored since they will almost never be observed in either model” (Neary, 1980, p. 815). Herberg & Kemp (1980) do not agree with Neary’s assessment of his findings.
On the contrary they suggest that only partial equilibrium is possible within the H-O-S model as distortions in the factors of production would have an unpredictable impact on the market. Helpman & Razin (2001) have also conducted empirical research pointing to weaknesses in the H-O-S model. They argue that the H-O-S model cannot be used to generalize about international trade as it is incapable of being applied to “uncertain environments” (p. 239). This view is further extended by Cole & Elliot (2003) when they question the model’s capacity to describe authentic trade phenomena.
They believe the model, though it holds firm in abstract, is far from useful in explaining the day-to-day manipulations of the international trade arena. Empirical research by Ishikawa (1996) on the applicability of the factor price equalization theorem has produced contrasting results. Ishikawa (1996) points out that even though the model cannot adequate explain migratory patterns it does serve as a useful predictor of how labor factors could respond under various situations.
Ishikawa (1996) highlights that the model holds for diversified economies that are able to maintain equilibrium between output and the cost of the factors of production. In countries where there is total specialization Ishikawa (1996) does not believe the H-O-S model is able to explain the fully explain the dynamics of migratory trends. In one scenario he suggests that in an economy where the factors of production are skilled and unskilled labor, skilled workers would readily migrate to another country to obtain better wages thereby depleting the home country of this necessary resource.
He suggests however that equalization could still be achieved as unskilled workers may be willing to immigrate into the home country to fill the spaces vacated by the skilled workers). He concludes by arguing that in both scenarios the “factor price equalization theorem must in fact hold” (Ishikawa, 1996, p. 590). Furthermore Gramm (2004) also highlights that the model performs poorly as a long-run microeconomic model. He does not believe that the reallocation of factors of production between industries is as easy as is being suggested (p.
147). However, as economic trends have shown, the relationship between commodity prices and output could be negatively correlated with neither necessarily having a direct impact on the other. Essentially, though the model has been useful in providing a framework upon which to make some generalized assumptions about the behavior of market forces, the theories are not as easily applied to the real world situation. The H-O-S model does have its merits but a few limitations have called into question its overall utility.
Helpman, E. & Razin, A. (2001). Uncertainty and international trade in the presence of stock markets. Review of Economic Studies, 239-250. Cole, M. A. & Elliott, R. J. R. (2003). Do Environmental Regulations Influence Trade Patterns? Testing Old and New Trade Theories. Malden, MA: Blackwell Publishing Ltd. Gramm, T. B. (2004). Factor reallocation costs and tests of the Heckscher-Ohlin trade theory. The International Trade Journal, 18(3), 147-176. Sachs, J. D. & Shatz, H. J. (1996, May). Globalization and the U. S. labor market: U.
S. trade with developing countries and wage inequality. AEA Papers & Proceedings, 234-239. Ishikawa, J. (1996, Aug. ). Scale economies in factor supplies, international trade, and migration. Canadian Journal of Economics, 29(3), 573-394. Neary, J. P. (1980, Sept. ). The side of paradox, or in defense of the correspondence principle: A reply to Herberg and Kemp. American Economic Review, 70(4), 815-818. Herberg, H. & Kemp, M. C. (1980). In defense of some “paradoxes of trade theory. The American Economic Review, 70(4), 812-814.Sample Essay of UkEssays