Heckscher-Ohlin Model Proven

With Costa Rica?s Trade Decisions

by Eric Swanson

Heckscher-Ohlin?s Theory on international trade focuses on how the resources that a country is blessed with determines the type of trade in which a country should specialize in.  In addition, if a country lacks in resources in one sector, they will import that product instead of specializing in it.  When a country specializes in and exports what they are resource abundant in, they will receive gains in trade.  Costa Rica, for example, has specialized in tourism, agriculture, and electronics.  Since they have specialized in these sectors, they have experienced great gains from trade that have helped improve their country?s economy and stability.  This came be proven by looking at the trade balances between the US and Costa Rica.

While exporting their resource abundant products with other countries, Costa Rica has received gains that have helped make its county much more stable in comparison to just ten years ago.  The Introduction to Selected World Development Indicators by the World Bank has proven the growth of Costa Rica?s economy.  From 2001 ? 2002, Costa Rica experienced a 1% GDP growth per capita.[1]  Education has improved from 73% in 1990 to 89% in 2002 for students achieving primary education.[2]  Mortality rates for children under five have decreased from 17 per 1,000 to only 11 per 1,000.[3]  These figures are obvious indicators of the improvement in the economy and quality of life for Costa Rica.

These increases are largely due to the fact that Costa Rica trades with various countries including the US.  Costa Rica?s economy is dependant on tourism, agriculture, and electronics.[4]  From its resources Costa Rica is able to export things such as coffee, bananas, sugar, and electronic equipment.[5]  The majority of Costa Rica?s exports are delivered to the US (51.8%); while the EU receives 20% and 10.6% goes to Central America.[6]  In actuality, Costa Rica exports a tremendous $847 million to the US.[7]  This can be seen in the following graphs.

In this graph we see the trade figures from the USITC figures for the years 1989 ? 1996.[8]  This graph shows that the exports to the US for SITC code 2 numbers of 5 and 7 were increasing.

In this numerical graph from USITC web site data, it is found that office machines, scientific instruments, and electrical machinery production have increased tremendously from previous years, when before they were hardly traded.[9]  This shows the decisions Costa Rica has made to emphasize its trade toward agriculture and electronics.  In order to realize the economic gain from these, the country began specializing in those sectors of trade with the US that Costa Rica found they were resource abundant in.  Likewise in imports, the US also traded its resource abundant materials and gained.  Costa Rica imports many raw materials, consumer goods, and capital equipment.[10]  Costa Rica receives 55.2% of its imports from the US, while the EU delivers 10.3%, and Mexico sends 6.2% of the imports.[11]  The US sent $992 million of imports to Costa Rica in 2002.[12]  This idea is shown again by the data attained by the USITC web site.  The following graph indicates the imports to Costa Rica delivered from the US.

This graph shows the large amount of articles of clothing that are sent to Costa Rica, using the SITC 2 code of 84.[13]  Also, it shows the steady increase of imports of yarn and industrial machinery, demonstrating the increase of raw materials and capital equipment from the US.  Once again, the idea that a country exports products developed form it most abundant resources, but imports products it lacks in resources is proven by the US sending over capital and raw materials.  The following graph shows the trade balance with the US for electrical machinery found from USITC web data.[14] 

Finally, in 2002, the trade balance is positive for Costa Rica.  This shows that Costa Rica is taking in more money from the US for its electrical machinery than US takes from Costa Rica for the same product description.  Overall, the trade balance between the US and Costa Rica is at $145 million.[15]  This is just another example of how Costa Rica is benefiting from its trade with the US by specializing in exporting its resource abundant sectors.

            Overall, in this example of the trade between Costa Rica and the US, the Heckscher-Ohlin model proves that countries will export what they are resource abundant in and import what they are they are resource lacking in and still gain from trade.  Costa Rica?s economy and quality of life is better than in comparison to ten years ago.  This can be attributed to the trade that they are experiencing with other countries such as the US.  Heckscher-Ohlin model works not just as theory but in practice too.       

BIBLIOGRAPHY

?Costa Rica Profile: Economy?. [cited 7 Oct 03]. available from

http://nationmaster.com/country/cs/Economy; INTERNET.

?Introduction to Selected World Development Indicators?. [cited 7 Oct 03]. available

from   http://econ.worldbank.org/files/3042_select.pdf ; INTERNET.

 ?USITC Interactive Tariff and Trade DataWeb?. [cited 7 Oct 03]. available from

http://dataweb.usitc.gov/scripts/user_set.asp ; INTERNET.

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