Answer to Question #295083 in Macroeconomics for Saba

Question

State the assumptions of the Heckscher–Ohlin the-

ory. What is the meaning and importance of each

of these assumptions?

Answer 1

Solution:

The Heckscher-Ohlin theory of trade is predicated on six assumptions:

(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 - All companies sell identical products, market share has no bearing on the price, companies can enter and exit without difficulty, buyers have perfect or complete information, and companies cannot determine prices.

(3) All production functions are homogeneous to the first degree (implying constant returns to scale).

(4) Production functions differ between commodities but are the same in both countries.

(5) Production functions differ between commodities but are the same in both countries.

(6) Tastes are the same in both countries (more specifically, both countries have identical homothetic community indifference maps.)