- according to the h- o theory, a country should specialize in the production and export of those products that use intensive its relatively abundant factor.
- thus, a country that is relatively labored abundant should specialise in the production of relatively labour- intensive goods. It should then export those labour- intensive goods in exchange for capital- intensive goods.
- on the other hand a country that is relatively capital abundant should specialise in the production of relatively capital- intensive goods. It should then export those capital- intensive goods in exchange for labour- intensive goods.
- in conclusion, comparative advantage based on the h- o theory is explained by differences in national factor endowments, which reflect to different relative commodity prices.
- a nation will export and have comparative in the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor.
- the nation will import and have comparative disadvantage in the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.
- the h- o theory explains why labor abundant countries like india and china have a comparative advantage in the production and export of labor- intensive products such as clothing, footwear. The theory also helps us to understand why capital abundant countries like japan, the u.s. and Germany have a comparative advantage in the production and export of capital- intensive products such as cars, equipment, and machineries, if we consider another factor of production like ‘land’, it is easy to understand why a primarily land abundant country such as Australia has a comparative advantage in the production and export of land- intensive products such as agricultural and mineral products.