Date: 5th December, 2005
Name: Ayesha Petafi
Student ID: 163327
Degree Title: Bsc. Development Economics (2nd year)
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Course Name: Foreign Trade and Economic Development
Course Code: 153400106
Tutor’s Name: Sahar Rad
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Title of Essay: Discuss how trade leads to the convergence of factor prices in the Heckscher-Ohlin Model. Does empirical evidence validate the propositions of this theory?
Word Count: 2,909 words
Essay 1 :

Discuss how trade leads to the convergence of factor prices in the Heckscher-Ohlin Model. Does empirical evidence validate the propositions of this theory?

Abstract

The Heckscher-Ohlin model (H-O model) states that a country possesses comparative advantage for those goods whose factors of production are in relatively abundant supply in the country’s endowment. Input combinations depend on the relative factor prices and these in effect, influence the goods prices. Factor prices and the goods prices have a one-to-one relationship. Countries tend to export goods, whose production makes intensive use of the resources.
There are four components to the H-O model, and these are: The Heckscher-Ohlin Theorem, The Stopler-Samuelson Theorem, The Rybczynski Theorem and The Factor-Price Equalisation Theorem.

The Heckscher-Ohlin model (H-O model) was developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics [Krugman and Obstfeld, 2003]. This model states that a country possesses comparative advantage for those goods whose factors of production are in relatively abundant supply in the country’s endowment. Countries, in this model, are differentiated by the factor intensity of the good they produce. A land-intensive good will have a high land-labour ratio. Whereas, a labour-intensive good will have a lower