Full employment of capital implies the expression would hold with equality. Endowments The only difference between countries assumed in the model is differences in endowments of capital and labor. Definition A country is capital abundant relative to another country if it has more capital endowment per labor endowment than the other country. Demand Factor owners are the consumers of the goods. The factor owners have a well defined utility function defined over the two goods.
Consumers maximize utility to allocate income between the two goods.
When necessary we will assume that aggregate preferences can be represented by a homothetic utility function of the form where C S is the amount of steel consumed and C C is the amount of clothing consumed. The H-O model is a general equilibrium model. The income earned by the factors is used to purchase the two goods. The industries' revenue in turn is used to pay for the factor services. The prices of outputs and factors in an equilibrium are those which equalize supply and demand in all markets simultaneously.