5.3. Empirical Evidence for the Model Flashcards
Tests on US data
The Heckscher-Ohlin model says that trade is driven by differences in factor abundance across countries.
Although the US is very capital rich, i.e. it has a high proportion of capital per worker, the US exports are less capital-intensive than their imports.
This is the Leontief paradox, whereby a country with a higher capital-per-worker has a lower capital/labour ratio in exports than imports.
Tests on global data
A similar study was conducted with 27 countries and 12 factors of production by Bowen, Lemur and Sveikauskas.
They found similar results to Leontief and found that trade does not always run in the direction that the Heckscher-Ohlin model predicted.
Trade doesn’t align
The Heckscher-Ohlin model predicts that factor prices will be equalised across trading countries.
It also predicts that factors of production will produce and export a certain quantity of goods until factor prices are equalised.
Essentially, a predicted value of services from factors of production will be embodied in a predicted volume of trade between countries.
Because factor prices are not equalised across countries, the predicted volume of trade is much larger than actually occurs (i.e. actual trade is smaller, there is missing trade).
Missing trade
The reason for this missing trade appears to be the assumption of identical technology among countries:
- Technology affects the productivity of workers and therefore the value of labour services.
A country with high technology and a high value of labour services would not necessarily import a lot from a country with low technology and a low value of labour services.
Donald Davis and David Weinstein showed that if we relax the assumption of common technologies, along with assumptions underlying factor price equalisation:
- Countries produce the same goods and costless trade equalises prices of goods.
-Then the predictions for the direction and volume of the factor content of trade line-up well with empirical evidence and ultimately generate a good fit.
Contrasing exports of nations
Contrast the exports of labour-abundant, skill-scarce nations in the developing world with the exports of skill-abundant, labour-scarce nations.
The exports of the three developing countries to the US are concentrated in sectors with the lowest skill intensity.
The exports of the three skill abundant countries to the US are concentrated in sectors with higher skill intensity.
Compare changing exports
Compare how exports change when a country such as China grows and becomes relatively more skill-abundant.
The concentration of exports in high-skill sectors steadily increases over time.
In the most recent years, the greatest share of exports is transacted in the highest skill-intensity sectors, whereas exports were concentrated in the lowest-skill intensity sectors in the earlier years.
