International-Business-Dr-R-Chandran-E-book

Assumptions of Heckscher-Ohilin Theory
230
International Business- Dr. R. Chandran
1. The theory is based on a 2 × 2 × 2 model. It takes in to consideration
that there are two countries, two commodities and two factors of
production.
2. Transport costs or other impediments to trade are not taken in to
account. This assumption applies that the prices of commodities under
trade will be the same in both the countries.
3. The Theory assumes the existence of perfect competition in both the
commodity and factor markets. This implies that both capital and
labour are perfectly mobile in respective country, and would move
from low paying industries in to high paying ones. Perfect
competition in the commodity market implies that neither a
monopolistic nor oligopolistic environment prevails.
4. All production factors are homogeneous in degree, specially it expects
returns to scale in production of each commodity in each country. For
example a 10 percent increase in factor inputs in each industry results
in exactly 10 percent output in that industry.
5. The production functions are such that the two commodities show
different factor intensities. This means that different combinations of
factors or production techniques are used in different industries. The
goods ‘Y’ may be capital intensive while the goods ‘X’ may be labour
intensive. Goods that are labour intensive will always remain labour
intensive irrespective of relative changes in the price of labour.
6. The production function differs between two commodities but
nevertheless remain same in both the countries. Thus the production
techniques and factors intensity used in producing goods ‘Y’ in
country A is the same as that is used in producing goods ‘X’ in
country B. the same is true about production function for goods ‘X’ in
country A and B. This implies that the best available techniques are
known to both the countries and are used in the price of labour.
7. The theory assumes that full employment resources exists in both the
countries so that production takes place on the same point on the
production possibility curve and not somewhere below it.
8. It also assumes that preferences and technology levels do not change.
Practically, technology has become accessible to anyone both
indigenous and internationally. Germany, Japan and USA have proved
their high levels of technology in medical equipments, entertainment
electronics and chemicals & drugs respectively. Today, productivity is
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