Heckscher–Ohlin theorem

In the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good."

The critical assumption of the Heckscher–Ohlin model is that the two countries are identical, except for the difference in resource endowments.

The relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant country and vice versa.

Initially, when the countries are not trading: Once trade is allowed, profit-seeking firms will move their products to the markets that have (temporary) higher price.

As a result: The Leontief paradox, presented by Wassily Leontief in 1951,[1] found that the U.S. (the most capital-abundant country in the world by any criterion) exported labor-intensive commodities and imported capital-intensive commodities, in apparent contradiction with the Heckscher–Ohlin theorem.

Basic situation: Two identical countries (A and B) have different initial factor endowments. Autarky equilibrium ( ): no trade, individual production equals consumption. Trade equilibrium: both countries consume the same ( ), especially beyond their own Production–possibility frontier ; production and consumption points are divergent.