Factor
Endowment Theory (Heckscher-Ohlin Theory) improves on the Absolute
Cost Advantage Theory and Comparative Cost Advantage Theory. Factor Endowment
Theory (Heckscher-Ohlin Theory) tries to explain the crucial question of
why country’s trade, good and services with each other. It is based on the
hypothesis that, country’s trade with each other as they differ with respect to
the availability of the factors of production, i.e., land, labour and capital.
For example- United States is a capital rich country. Hence, it’s export bucket
will be dominated by capital intensive products like aeroplanes, submarines,
tanks, super computers, high end servers, etc. Where as India has labour abundance,
so its export bucket is dominated by products with labour contents like gems
and jewelleries, textile, handicrafts, sports toys, handloom, electronic and IT
services.
Factor Endowment Theory (Heckscher-Ohlin Theory) explains that a country will specialise in the production
of goods and services that it is particularly endowed with and are suited for
production in that country. Some countries that have enough capital but are
scares in labour force. Again, some countries specialise in production of goods
and services that in particular require more capital. Factor Endowment Theory (Heckscher-Ohlin Theory) propounds that specialisation in production and trade among
countries generate higher economies of scale and scope and ensures higher
standard of living for the countries involved.
Basic assumptions of Factor
Endowment Theory (Heckscher-Ohlin Theory):
- Countries worldwide are endowed with different factors of production, i.e., land, labour and capital may not be in equal proportion in all countries.
- Production of goods either requires relatively more capital or land or labour.
- Factors of production don’t move between two countries.
- Factor Endowment Theory (Heckscher-Ohlin Theory) assumes no transport cost.
- The consumers and users in two trading countries may have the same needs.
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