Measuring the factor content of trade
Can the Heckscher-Ohlin-Vanek Theorem explain observed commodity trade?
My conclusion is that it can. When factors and factor contents are measured correctly,
we see a relationship between endowments and factor content flows. I describe the
appropriate way to use OECD input-output tables, bilateral trade data, and national
income data for nine member countries to calculate the measured and predicted factor
contents of trade under both the traditional country-by-country approach and the new
A simple relationship between the observed national production techniques does
not exist. Letting the production data speak for itself, the factor content of output
matches well with the national factor endowments.
Under the traditional method, I show that neither adjusting for not-traded goods
nor allowing for quasi-homothetic preferences significantly improves the performance of
the theory. I recognize that factor services are not homogeneous across countries. The
Moore-Penrose inverse is used to construct a logical conversion matrix that translates
foreign factors into their domestic equivalents. A new measured factor content of trade
based on this aggregation method first calculates the factor content of goods where they
were produced then converts those factors into domestic ones before aggregating across
countries. With this translation, the performance of the theory in the trade test improves.
Using the new integrated approach, I compare the assumption of perfect
homogeneity with its opposite, complete heterogeneity of factor services. While the
summary results for homogeneous factors look appealing, the case for country-specific
factors is compelling. Identifying factors by country results in cases of both too much
and too little factor content of trade. Among the EU members, factor content exchange is
predicted well. This suggests that as barriers to trade are reduced and globalization
homogenizes tastes, the importance of endowments in explaining trade patterns will
increase. In the meantime, proper incorporation of imported intermediate inputs and
heterogeneous factors are important clues to solving the mystery of the missing trade.
School:The Ohio State University
School Location:USA - Ohio
Source Type:Master's Thesis
Keywords:heckscher ohlin principle factor proportions comparative advantage international trade input output analysis
Date of Publication: