# Understanding the Heckscher-Ohlin Model in International Trade

![Hecksher-Ohlin Model](https://www.investopedia.com/thmb/lw9hufH6k1RxWdOI0BfemYFXPRk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Heckscherohlin-model-1cae8fdf38cb41a6bf609552cced8366.jpg)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> The Heckscher-Ohlin model is a theory that explains how countries can achieve prosperity by exporting the goods they can produce most efficiently while importing goods they cannot.

## What Is the Heckscher-Ohlin Model?

The Heckscher-Ohlin model is an economic theory focused on trade and resource allocation. The model compares a country's export of goods and [factors of production](https://www.investopedia.com/terms/f/factors-production.asp) with its import of goods that it can't produce as efficiently. It plays an important role in determining a country's [export](https://www.investopedia.com/terms/e/export.asp) and import strategies based on resource abundance. The model applies to commodities and factors like labor.

### Key Takeaways

*   The Heckscher-Ohlin model suggests countries should export goods they can produce most efficiently.
*   It examines trade equilibrium by comparing exports of abundant resources with imports of scarce resources.
*   The model highlights the importance of international trade and the global benefits of exchanging abundant resources.
*   It incorporates various production factors such as labor and suggests focusing production on industries with cost advantages.
*   Originating from ideas by Eli Heckscher and Bertil Ohlin, Paul Samuelson expanded on this model in later years.

## How the Heckscher-Ohlin Model Defines Trade Dynamics

The Heckscher-Ohlin model was formed from a 1919 Swedish paper by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist [Paul Samuelson](https://www.investopedia.com/terms/p/paul-samuelson.asp) expanded the original model through articles written in 1948, 1949, and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate and [trade](https://www.investopedia.com/terms/t/trade.asp) when resources are imbalanced. It defines the preferred balance between two countries, each with its resources. It takes the position that countries should ideally export materials and resources that they have an excess of while proportionately importing those resources they need.

The model isn't limited to tradable [commodities](https://www.investopedia.com/terms/c/commodity.asp). It incorporates other production factors such as labor. According to the model, labor costs vary so countries with cheap labor forces should focus primarily on producing labor-intensive goods.

> **Important**
>
> The Heckscher-Ohlin model argues that traded commodities are land, labor, and capital bundles. Trading moves these bundles from places where they are abundant to places where they are scarce.

## Practical Example of the Heckscher-Ohlin Model in Action

Certain countries have extensive [oil reserves](https://www.investopedia.com/terms/o/oil-reserves.asp) but they have very little iron ore. Other countries can easily access and store [precious metals](https://www.investopedia.com/terms/p/preciousmetal.asp) but they have little in the way of agriculture.

The Netherlands exported almost $696 million in U.S. dollars in 2021 compared to imports of approximately $623 million. Its top import-export partner was Germany. Importing on a close to equal basis allowed it to efficiently and economically manufacture and provide exports.

## What Are the Top Traded Commodities?

Crude oil is the most traded commodity around the globe. It's used in automotive fuels, lubricants, and heating oils. Gold, silver, and natural gas are next, followed by coffee, soybeans, and cotton.

## What Is the Linder Hypothesis?

The [Linder hypothesis](https://www.investopedia.com/terms/l/linder-hypothesis.asp) states that countries with similar incomes require similarly valued products and allow them to trade with each other. It argues that countries with close incomes per capita should focus on trading with each other.

## What Is the Cost of Labor in the U.S.?

The cost of labor is the total compensation paid to and for employees including wages, salaries, benefits, and payroll taxes. It's measured by comparing costs incurred for various types of personnel from quarter to quarter or annually. It increased by 0.9% for civilian workers in the second quarter of 2024 and by 4.1% over the previous 12 months as of June 2024.

## The Bottom Line

The Heckscher-Ohlin model emphasizes the benefits of international trade and the global advantages that can ensue when each country exports domestically abundant resources. Additionally, it argues that all countries benefit when they import the resources they lack. The model helps countries achieve trade equilibrium and leverage their natural resource advantages. Based on labor and other production factors, the model shows how nations can focus on labor-intensive goods when labor is abundant and cost-effective. Trading internationally allows countries to adjust to capital-intensive goods production that wouldn't be possible if each country only sold goods internally.

> **Article Sources**
>
> 1.  Cornell University. "[Heckscher–Ohlin Trade Theory](https://courses.cit.cornell.edu/econ6100/JonesHecksherOhlin.pdf)." Pages 1, 6.
>     
> 2.  Harvard University. "[Paul Samuelson’s Contributions to International Economics](https://scholar.harvard.edu/files/rogoff/files/samuelson.pdf)."
>     
> 3.  Princeton University. "[The Heckscher-Ohlin Model In Theory and Practice](https://ies.princeton.edu/pdf/S77.pdf)."
>     
> 4.  World Integrated Trade Solution. "[Netherlands Trade: At a Glance](https://wits.worldbank.org/countrysnapshot/en/NLD)."
>     
> 5.  ATFX. "[What Are the Most Traded Commodities Globally?](https://www.atfx.com/en/analysis/trading-strategies/most-traded-commodities-globally)"
>     
> 6.  University of Michigan Gerald R. Ford School of Public Policy. "[A Product-Quality View of The Linder Hypothesis](https://deepblue.lib.umich.edu/bitstream/handle/2027.42/49537/IPC-working-paper-024-Hallak.pdf;sequence=1)." Page 4.
>     
> 7.  National Bureau of Economic Research. "[A Product-Quality View of the Linder Hypothesis](https://www.nber.org/papers/w12712)."
>     
> 8.  U.S. Bureau of Labor Statistics. "[Employment Cost Index](https://www.bls.gov/eci/)."