Chapter 3 Higher dimensional issues in trade theory

Abstract

The extensive structure of modern trade theory has been built on a foundation of several extreme assumptions, including that of low and even dimensionality. This chapter is concerned with Heckscher–Ohlin theory of international trade in higher dimensions. This theory, in its standard two-commodity, two-factor version has dominated international trade theory for over 30 years. But this dominance has long been made uneasy by a widespread suspicion that world commerce does not accord well with the theoretical structure. There are two particular areas of concern. The first stems from the fact that the largest part of world trade involves the exchange of roughly similar products among similar economies, whereas the factor endowment theory, and comparative cost theory, generally teaches to look to international dissimilarities for the causes of trade. A large part of this actual trade is classified as intraindustry even with significant disaggregation. Thus probing its causes requires a high degree of disaggregation—that is, the explicit consideration of a large number of goods. The second area of concern stems from the Leontief Paradox. The sensitivity to higher dimensions of the basic propositions of the modern theory of international trade is the key issue for the practical relevance of the logical structure that has dominated trade theory in the past 30 years.