Explain how the H-O theory can be used to explain the pattern of trade between two countries. Outline the assumptions of the theory to hold true in its purest form.​

Answer and Explanation:

The Heckscher-Ohlin economic model, also known as H-O theorem, presents the idea that trade relations between the two countries are based on the resource that each country has in abundance, that is, each country will exploit economically, the most abundant resource and establish trade relations with other countries, exporting it.

We can prove this theorem, by observing that countries that have favorable environmental conditions for agriculture, will establish their commercial relations based on the agricultural products that they can export. Among these countries, we can mention China and its strong export of rice and Brazil and its strong export of orange juice. On the other hand, countries that have as main resource the production of machines, will export these machines to establish their commercial relations, like Germany and a strong export of automobiles.