What is factor proportion model?

What is factor proportion model?

It is this ratio (or proportion) of one factor to another that gives the model its generic name: the factor proportions model. In a model in which each country produces two goods, an assumption must be made as to which industry has the larger capital-labor ratio.

Why is the H-O model called the factor proportions theory?

The H-O model assumes private ownership of capital. We imagine, and therefore assume, that different industries, producing different goods, have different capital-labor ratios. It is this ratio (or proportion) of one factor to another that gives the model its generic name: the Factor Proportions Model.

What is the Heckscher-Ohlin factor proportions theorem of international trade?

Simply stated, the theorem says that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.

Is the factor proportion theory still relevant?

The factor proportions theory developed by the Swedish economist Eli Heckscher, and later expanded by his former graduate student Bertil Ohlin, formed the major theory of international trade and is still widely accepted today.

What are the assumptions of Heckscher-Ohlin model?

There are six assumptions usually postulated with the Heckscher-Ohlin theory of trade: (1) no transportation costs or trade barriers (implying identical commodity prices in every country with free trade), (2) perfect competition in both commodity and factor markets, (3) all production functions are homogeneous to the …

What are the four factors of endowment Mcq?

2. What are the four factor endowments?

• National resources, labor, physical capital and human capital.
• Types of technology.
• Material inputs used up in the process of production.
• International differences in climate.