FACTOR-PROPORTIONS THEORY

FACTOR-PROPORTIONS THEORY
In their theories of absolute and comparative advantage, Smith and Ricardo showed how output could be increased if countries specialized in the products for which they have an advantage. Their theories did not, however, help to
identify which types of products would most likely give a country an advantage. They assumed that the workings of the free market would lead producers to the goods that they could produce more efficiently and away from the goods that they could not produce efficiently. About a century and a quarter later, two Swedish economists, Eli Heckscher and Bertil Ohlin, developed the factor-proportions theory, which held that differences in countries' endowments of labor relative to their endowments of land or capital would explain differences in factor costs. They proposed that if labor were abundant in relation to land and capital, labor costs would be low and land and capital costs high. If labor were scarce, then the price of labor would be high in relation to the price of land and capital. These factor costs would lead countries to excel in the production and export of products using their abundant, and therefore cheaper, factors of productions.

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