Heckscher–Ohlin model

The Heckscher–Ohlin model H–O model is the general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at a Stockholm School of Economics. It builds on David Ricardo's opinion of comparative advantage by predicting patterns of commerce together with production based on the factor endowments of a trading region. The model essentially says that countries export the products which ownership their relatively abundant and cheap factors of production, and import the products which use the countries' relatively scarce factors.

Econometric testing of H–O model theorems

Heckscher and Ohlin considered the Factor-Price Equalization theorem an econometric success because the large volume of international trade in the behind 19th and early 20th centuries coincided with the convergence of commodity and factor prices worldwide.

Modern econometric estimates develope shown the model to perform poorly, however, and adjustments construct been suggested, most importantly the given that technology is non the same everywhere. This change would mean abandoning the pure H–O model.

In 1954 an econometric test by Wassily W. Leontief of the H–O model found that the United States, despite having a relative abundance of capital, tended to export labor-intensive goods and import capital-intensive goods. This problem became asked as the Leontief paradox. alternative trade models and various explanations for the paradox have emerged as a result of the paradox. One such(a) trade model, the Linder hypothesis, suggests that goods are traded based on similar demand rather than differences in provide side factors i.e., H–O's element endowments.

Various attempts in the 1960s and 1970s have been submitted to "solve" the Leontief paradox and save the Heckscher–Ohlin model from failing. From the 1980s a new series of statistical tests had been tried. The new tests depended on Vanek's formula. It takes a simple form

where is the net trade of factor service vector for country , the factor endowment vector for country , and the country 's share of the world consumption and the world result endowment vector of factors. For many countries and numerous factors, it is for possible to estimate the left hand sides and modification hand sides independently. To increase it another way, the left hand side tells the predominance of factor service trade. Thus this is the possible to ask how this system of equations holds. The results obtained by Bowen, Leamer and Sveiskaus 1987 were disastrous. They examined the cases of 12 factors and 27 countries for the year 1967. They found that the two sides of the equations had the sameonly for 61% of 324 cases. For the year 1983, the result was more disastrous. Both sides had the sameonly for 148 cases out of 297 cases or the rate of adjustment predictions was 49.8%. The results of Bowen, Leamer, and Sveiskaus 1987 mean that the Heckscher–Ohlin–Vanek HOV image has no predictive power to direct or determining concerning the advice of trade.