Bertil Ohlin

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1 Overview
2 Main Idea
3 Related Theorems
4 See also
5 Significant Publications
6 External links
7 Bibliography

Overview

Bertil Ohlin (pronounced “ber´til O´lin”) (April 23, 1899 – August 3, 1979), was a Swedish economist and winner of the 1977 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. His name lives on in one of the standard mathematical model of international free trade, the Hecksher-Ohlin model.

Having received his B.A. from Lund University 1917, and his M.A. from Harvard University in 1923, Ohlin received his doctorate from Stockholm University in 1924. In 1925 he became a professor at the University of Copenhagen. In 1929 he debated with John Maynard Keynes, contradicting the latter's view on the consequences of the heavy war reparations payments imposed on Germany. (Keynes predicted a war caused by the burden of debt, Ohlin thought that Germany could afford the reparations.) Although Keynes was probably right, the debate was important in the modern theory of unilateral international payments.

In 1930 Ohlin succeeded Eli Heckscher, his teacher, as a professor of economics, at the Stockholm School of Economics. In 1933 Olin published a work that made him world renowned, Interregional and International Trade. In this Ohlin built an economic theory of international trade from earlier work by Heckscher and his own doctoral thesis. It is now known as the Heckscher-Ohlin model, one of the standard model economists use to debate trade theory.

The model was a break-though because it showed how comparative advantage might relate to general features of a country's capital and labour, and how these features might change through time. The model provided a basis for later work on the effects of protection on real wages, and has been fruitful in producing predictions and analysis; Ohlin himself used the model to derive the Heckscher-Ohlin theorem, that nations would specialize in industries most able to utilize their mix of national resources efficiently. Today, the theory has been largely disproved, yet it is still a useful framework by which to understand international trade.

Later, Ohlin and other members of the "Stockholm school" extended Knut Wicksell's economic analysis to produce a theory of the macroeconomy anticipating Keynesianism.

Ohlin was party leader of the liberal Folkpartiet from 1944 to 1967, the main opposition party to the Social Democrat Governments of the era, and from '44 to '45 was minister of commerce in the wartime government. His daughter Anne Wibble, representing the same party, served as Minister of Finance in 1991-1994.

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Main Idea

The Heckscher-Ohlin Theory

The theory is that trade between countries is in proportion to their relative amounts of capital and labor. In countries with an abundance of capital, wage rates tend to be high; therefore, labor-intensive products, e.g. textiles, simple electronics, etc., are more costly to produce internally. In contrast, capital-intensive products, e.g. automobiles, chemicals, etc., are relatively less costly to produce internally. Countries with large amounts of capital will export capital-intensive products and import labor-intensive products with the proceeds. Countries with high amounts of labor will do the reverse. (1)

The following conditions must be true. (2)

The major factors of production, namely labor and capital, are not available in the same proportion in both countries.
The two goods produced either require relatively more capital or relatively more labor.
Labor and capital do not move between the two countries.
There are no costs associated with transporting the goods between countries.
The citizens of the two trading countries have the same needs.

The theory does not depend total amounts of capital or labor, but on the amounts per worker. This allows small countries to trade with large countries by specializing in production of products that use the factors which are more available than its trading partner. The key assumption is that capital and labor are not available in the same proportions in the two countries. That leads to specialization, which in turn benefits the country’s economic welfare. The greater the difference between the two countries, the greater the gain from specialization. (2)

Leontief made a study of the theory that seemed to invalidate it. He noted that the United States had a lot of capital; therefore, it should export capital-intensive products and import labor-intensive products. Instead, he found that it exported products that used more labor than the products it imported. This is counter to the H-O Theory, and it is named The Leontief Paradox. (1) ”However, Leontief's explanation was that the workers in the U.S. have a lot of knowledge. In other words, the U.S. exports the goods that require a production factor that the U.S. is particularly well-endowed with, namely knowledge. Thus, Leontief's explanation was consistent with the Heckscher-Ohlin theory.” (2)

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Related Theorems

The Stolper-Samuelson Theorem – “if the price of the capital-intensive good rises (for whatever reason) then the price of capital, the factor used intensively in that industry, will rise, while the wage rate paid to labor will fall.” “Similarly, if the price of the labor-intensive good were to rise then the wage rate would rise while the rental rate would fall.” (3)
The Rybczynski Theorem – “an increase in a country's endowment of a factor will cause an increase in output of the good which uses that factor intensively, and a decrease in the output of the other good” (3)
Factor Price Equalization Theorem – “When the prices of the output goods are equalized between countries, as when countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.” (3) This theorem requires the following assumptions.
- No Barriers to trade
- No transportation costs
- Perfect competition + full employment
- Factors are mobile in each country but are immobile across national borders
- No specialization in one product
- Production functions exhibit constant returns to scale (CRS) and differ among industries
- Identical technologies between countries
- No factor intensity reversal