Answer to Question #292813 in Economics for Hafsa

Question

State the assumptions of the Heckscher–Ohlin theory. What is the meaning and importance of each of these assumptions?

Answer 1

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 first degree (implying constant returns to scale), (4) production functions are such that the two commodities always show different factor intensities,

(5) production functions differ between commodities but are the same in both countries, and

(6) tastes are the same in both countries (more specifically, both countries have identical homothetic

community indifference maps).