A simulation of the Heckscher–Ohlin theorem

Abstract

The Heckscher–Ohlin (H–O) theorem is one of the classical results in international trade theory. In the real world, however, this tendency has not been observed. Two restrictive assumptions are required for this theorem to hold. One is the identity of utility functions between the two trading countries, and the other relates to production functions. In this paper, simulations are conducted to identity which assumption is more important in order for the H–O theorem to hold. Production functions (constant returns to scale) and utility functions are assumed to be of Cobb–Douglas type. In the first simulation, 10,000 pairs of parameters on production and utility functions are selected randomly, where production function on both countries are identical and utility functions can be different. The H–O property is observed for approximately 70% of the solutions. In the second simulation, the same simulation is conducted where utility functions in both countries are identical and production functions can be different. Then, H–O property is observed for approximately 50% of the solutions.