Applying Heckscher Ohlin Theorem Essay

1380 words - 6 pages

The Heckscher-Ohlin (H-O) model is a general equilibrium model that shows the impact of different ownership of resources by countries on the trade (Feenstra & Taylor, 2011). This model shows a long-run effect as all factors of productions can move freely. Various assumptions are made in this model, including:
1. Free trade
2. Identical technology level of trading partners,
3. Identical and homothetic preferences
4. Ability of factors to move freely between industry

The H-O theorem states that a country will export the good that uses intensively the factor of production it has in abundance, and will import the other good. This report will first review the imports and exports pattern between two selected countries-Australia and Indonesia. Next, analysis on the resources endowments of the two countries will be compared with the trade patterns. Based on our findings, conclusions will be made as to whether the H-O Theorem stands up to its main predictions. Lastly, any major differences in trade patterns will be discussed theoretically.

Current Prediction

As shown in Table 2 (see appendix), Australia’s capital to labour ratio is more than 10 times higher than Indonesia’s. Based on H-O model, we would expect to see Australia exporting more capital-intensive goods than Indonesia. Furthermore, developing country like Indonesia is often associated with having a large pool of cheap labour, compared to developed nation like Australia. Trade pattern will not only be examined by using capital and labour as factor of productions only. Resources abundance and environment play a part too.
Analysing Trade Pattern

Table 1 (see appendix) shows the 10 main principal imports and exports of Australia with Indonesia for the year 2010, as recorded by the Australian Department of Foreign Affairs and Trade.
Approximately 93% of Australia’s exports to Indonesia consist of agricultural product such as wheat, cotton, live animals (excluding seafood), beef, milk, cream, fertilisers (excluding crude) and waste paper. Wheat on its own made up 40% and was AU$968,654 in monetary term.
Mining products such as crude petroleum made up 5% of Australia’s primary exports to Indonesia.
Manufacturing goods including copper and aluminium was at 10% and 13% level respectively.

In terms of imports, Australia’s 2010 crude petroleum import stand at a high 70% level and in monetary value was $2,599,957. Other mining products such as iron ore and concentrates occupied only 1% of the list. Gold import was at a relatively high level of AU$462,358 and made up 12% of the total principal imports value.
Manufactured goods’ share on Australia’s total imports from Indonesia was 13%. Those goods are monitors, projectors and TVs, paper and paperboard, rubber tyres, furniture, mattress and cushions and electrical distributing equipment.
Agriculture products imported to Australia by Indonesia, such as cocoa made up 1% of the total imports while minimally worked woods made...

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