The theory of comparative advantage makes the important assumption that resources
can be freely switched between the manufacture of different products without any loss
of productivity. Even in the abstract world of economic theory this is clearly not realistic.
In the 1920s two Swedish economists, Eli Heckscher and Bertil Ohlin, concluded
that because countries have different endowments of factors of production, attempts to
substitute one factor for another usually result in falling productivity or may not be possible
at all. For example, America with its great prairies can expand grain production,
but if the UK tries to switch more labour into agriculture, as we assumed in the example
earlier in the chapter, yields would fall as the land was farmed more intensively.
Conversely, although the UK with its abundant skilled labour can easily expand cloth
production, the USA runs into diminishing returns due to the lack of suitable labour.
Heckscher and Ohlin argued that these differences in the available factors of production
(land, labour, etc.) can lead to differences in production costs between countries. All we
need for trade to be beneficial is that economic resources are unevenly distributed
between countries. Winters 8 summarizes these minimum conditions as follows: