Digressions on Factor Endowment Theory and Trade Empirics

Abstract

Abstract The empirical issues and extensions of the basic HOS model to reconcile its theoretical predictions and the empirical observations are discussed in this chapter. These issues and extensions are discussed in two particular contexts. First is the empirical test of the HO theorem by Leontief who found the predicted and actual pattern of trade being at odds with each other—known as the Leontief paradox—and subsequent refinements of the test in terms of factor content of trade and a generalized theorem known as the Heckscher-Ohlin-Vanek (HOV) theorem. Plausible theoretical explanations for the Leontief paradox are briefly discussed. Second, the chapter elaborates upon two variations of the HOS model in terms of non-traded good and immobility of factors across sector (or sector specificity of factors) and their implications for the price magnification effect and the FPE theorem. These cases have far-reaching implications for the observed global rise in wage inequality since the mid-1980s, which is in sharp contrast with the prediction of the HOS model. Finally, higher dimension issues in HOS model—such as many goods and many factors of production in an economy—are discussed as an advanced topic.