Differing Factor Endowments and Geographical Specialisation in Ohlin’s Theorem

In Ohlin’s theorem it appears that the greater the inequality in factor proportions, the greater will be the comparative costs advantage to the countries concerned in producing the goods using intensively their relative abundant factor. Obviously, then, a country will tend to specialise in goods using its abundant factor intensively. The specialisation may be partial or complete depending on various considerations.

In the basic Heckscher-Ohlin model, let us examine when the specialisation will be partial and complete. For this an Edgeworth-Bowley Box diagram has been drawn as in. The box XYZQ shows the factor endowments with country A and the box X’ Y’Z’ Q’ shows those of B. XY and X’ Y’ (or X’ Y’) are the contract curves of the countries A and B respectively.

Line XM is drawn as tangent to the contract curve XY’ at the origin X. It cuts the contract curve XY at M. The diagonal XY is drawn which cuts the contract curve XY’ at T. Then, any point between X and T on the contract curve XY’ has a corresponding point between Y and M on the contract curve XY apparently by applying the theorem of corresponding points, seen in the previous section.

These corresponding points are the possible trade equilibrium points, as commodity price- ratios in both countries are equalised at these points. It is evident that, at all such points each country after trade will be producing something of each goods (X and Y). As such the specialisation is partial.

To specify the condition for partial specialisation, thus, let us take point L between X and Ton the contract curve XY’. Join XL and extend it so that, it touches XY curve at point D and QY axis at R. Points L and D are the corresponding trade equilibrium points. At these points both countries are using the same factor-proportion in the production of each good (X and Y).

At point L (pertaining to the country B), the capital-labour ratio in producing good X is shown

By similarly, at point D (pertaining to country A), the capital-labour ratio is the same for

Producing commodity X. Let us denote, i.e., capital-labour ratio in producing the good X.

Now, the factor endowment ratio of country A is indicated by the diagonal XY,

Similarly, the factor endowment ratio of country B

It follows thus, that when the factor endowment ratios in the two countries lie between the ratios of factor proportions that are used in the production of each good, a partial specialisation takes place.

However, for a country tending to have a complete specialisation depends upon the international commodity price ratio. If the commodity price ratio after trade is such that production in country B

(XY) (The commodity price ratios being equal at T and Y). Therefore, when the international price ratio leads country B to produce somewhere on TY’ segment, then at this price-ratio country A will tend to specialise completely in producing good X which intensively uses its abundant factor – capital.

Similarly, any point between X and M on A’s contract curve (XY) denotes the ratio

Further, there is greater possibility of complete specialisation when the relative factor endowments of the two countries have greater dispersal.

Assuming that country A has still greater proportion of capital, the box XYQZ will expand towards right and new box will be XY” and XQ”. Now, the new diagonal AT” will intersect B s contract curve at point T’, which is below T, so that 5’s area of partial specialisation diminishes to that extent. Similarly, when tangent line XM is extended to cut new contract curve XY, A’s area of partial specialisation becomes Y” M which is less than YM (in the previous case).

So also, the possibility of complete specialisation becomes greater when the difference in the factor intensities of the two goods lessen. In this case, the new contract curves will become less convex and steeper for both the countries. It will be seen that YT’ > YT and YM’ < YM. Thus, the range of partial specialisation in both the countries diminishes with the change in the production functions.

1. A comparative advantage accrues to each country because of differences in the relative factor endowments and intensive use of relatively abundant factor in the production of goods.

2. The comparative advantage becomes greater with the increased inequality of factor endowments between two countries.

3. When the factor endowments inequality is widened, the possibility of complete specialisation of one of the two countries increases.

4. The possibility of complete specialisation also becomes more when the difference in the factor intensities of the goods is reduced.

In time, it may be concluded that: the possibility of complete specialisation in one of the two countries depends on their relative diversity of factor endowments rather than the diversity in the factor-proportions used in the production of two goods.

Thus, when the difference in relative factor endowments is considerably large as compared to the differences in factor-proportion (or intensities) used in the production of two goods, each of the two countries will tend to have complete specialisation in the production of goods using its relatively abundant factor.