International Trade Theory and Policy
by Steven M. Suranovic
Trade 601C

HeckscherOhlin Model Assumptions  Fixed versus Variable ProportionsTwo different assumptions can be applied in a HeckscherOhlin model: fixed and variable proportions. A fixed proportions assumption means that the capitallabor ratio in each production process is fixed. A variable proportions assumption means that the capitallabor ratio can adjust to changes in the wage rate for labor and rental rate for capital. Fixed proportions is a more simplistic and also less realistic assumption. However, many of the primary results of the HO model can be demonstrated within the context of fixed proportions. Thus the fixed proportions assumption is useful in deriving the fundamental theorems of the HO model. The variable proportions assumption is more realistic but makes solving the model significantly more difficult analytically. To derive the theorems of the HO model under variable proportions often requires the use of calculus. Fixed Factor Proportions Fixed factor proportions means that a_{KC}, a_{LC}, a_{KS}, and a_{LS} are exogenous to the model and are fixed. Since the capitaloutput and laboroutput ratios are fixed, the capitallabor ratios, and , are also fixed. Thus, clothing production must use capital to labor in a particular proportion regardless of the quantity of clothing produced. The ratio of capital to labor used in steel production is also fixed but is assumed different from the proportion used in clothing production. Variable Factor Proportions Under variable proportions the capitallabor ratio used in the production process is endogenous. The ratio will vary with changes in the factor prices. Thus if there were a large increase in wage rates paid to labor, producers would reduce their demand for labor and substitute relatively cheaper capital in the production process. This means a_{KC} and a_{LC} are variable rather than fixed. So as the wage and rental rates change, the capital output ratio and the labor output ratio are also going to change.
International Trade Theory and Policy  Chapter 601C: Last Updated on 7/31/06 