Test of the most generalized version of the Heckscher-Ohlin theorem

Abstract

A generalized version of the Heckscher-Ohlin model of trade has been developed by A. V. Deardorff [AER, September, 1982] for the 5factor, m-commodity, and n-country case. This model: 1) shows that a systematic relationship exists between the autarky prices of the factors of production and the factor content of trade; and 2) proves that countries tend to export those goods which use intensively (sparingly) those factors with relatively cheap (expensive) autarky prices. Deardorff's model is not testable because: 1) autarky factor prices are not observable; and 2) the information concerning the techniques used in imported goods (needed for the calculation of the actual factor intensity matrix) is usually unavailable and should not be estimated on the basis of techniques used in import-competing industries. (Remember Leontief's paradox!) To overcome the problem concerning the unobservability of autarky factor prices, the author has proven two theorems which make Deardorff's model testable. These allow for the replacement of the autarky factor prices with the corresponding post-trade prices whenever the former ones should be used in the test. According to the corollaries which follow from these two theorems, any positive test result which is conducted based on post-trade factor prices can be used as supportive evidence to validate Deardorff' s model which has formulated based on pre-trade factor price. However, unsatisfactory results cannot be used to falsify Deardorff' s model due to the fact that the proved conditions are sufficient but not necessary. The second problem discussed above, i.e., the lack of data about the factor content of imported goods, does not arise in the regional test when compared with a national test of this model. This is because the regional tests conducted in this study permit estimation of the actual production techniques used in different regions of the U. S. To test the validity of Deardorff's model, first the factor content and commodity composition of trade between the Pacific Northwest (geographical area containing the states of Washington, Oregon, and Idaho), and the rest of United States for five different years are estimated. These estimated values are then employed in an g-factor, m-commodity, and two-region model to examine the degree of importance of relatively cheap energy and capital prices and relatively expensive wage rates in determining the level and composition of the Pacific Northwest's trade with the rest of the United States. The results of this study, which is the first regional test of the most generalized version of the H-O Theorem, indicate that the Pacific Northwest has a comparative advantage in the production of those goods which intensively use energy and capital and sparingly use labor in their production processes. This finding is in accord with the prediction of Deardorff's model about the comparative advantage (and disadvantage) of a region with relatively cheap capital and energy prices and relatively expensive wage rates.