Factor Proportions Theory

Factor Proportions Theory, also known as the Heckscher-Ohlin model, explains how countries export and import goods based on their factor endowments—namely, the abundance of labor, land, and capital. Countries with an abundance of a specific factor will produce goods that intensively use that factor. For example, a labor-rich country may focus on manufacturing goods that require many workers, while a capital-rich country may specialize in goods that need more investment in machinery. This theory suggests that trade patterns are influenced by the differing resources countries possess, leading to specialization and economic efficiency.