Factor Proportion Theory

This theory further extends the concept of comparative advantage that exists for certain countries and this is explained in detail by the factor proportions theory. This theory hypothesizes that nations would generate materials that use plenty of production factors which are produced in the same country itself. In case of materials for which the raw materials are scant in the particular country, they do not make an attempt to produce such materials; instead they are imported (Hecksher & Ohlin 1933)

Factor Endowments and the Heckscher-Ohlin theory evaluate the impact of foreign trade on the production of the raw materials for producing a particular good by two competing nations. (Salvatore 1999). The products that need a great quantity of the cheap raw material will have the cheap cost of production. Therefore they would be exported for a lesser price than the competing nations. This offers a competitive advantage for such nations producing the particular material (Salvatore 1995).

The Heckscher-Ohlin theory focuses on the issue that worldwide and regional variations in costs of production may occur due to the dissimilarities in the contribution of production factors (Mcculloch 1999). This theory comprises of the following core proposals

Trade patterns and endowments of factor
Equalization of price of factor
Growth of factor and patterns of output
Distribution of income

The theory has many presumptions.

(i) Cost taking customers lessen the expense required to realize any level of utility (real income), and this assumption implicates “downward sloping demand curves” in the general form.

(ii) Manufacturers perform so as to optimize the country’s product given the resource donation. This presumption leads to “upward sloping supply curves” in the generalized format.

The following facts on the U.S and Vietnam are best explained by factor proportions theory.