One of the most well-known trade theories which reveals that international trade is largely driven by differences in countries’ resources was developed by Eli Heckscher and Bertil Ohlin. The theory emphasizes on predicting the pattern of trade in goods between two countries based on their differences in factor endowments. Heckscher and Ohlin started with the model of a two goods, two factors and two economies, concluding that each country would export the good that uses its abundant factor intensively1. Following this theory, Vanek presented the multi-good, multi-factor model, called the Heckscher-Ohlin-Vanek model (H-O-V model).
The goal of this model is to make a relation between the factor content of trade and the endowments of a country. The factor-content formulation of the HOV model attracted many empirical studies. The relationship between goods traded and factor endowments has been investigated by many researchers. Leamer, Bowen and Sveikauskas (1987)2 argued that the net trade of sectors is dependent on country-specific factor endowments rather than on sector-specific factor inputs. Trefler (1993, 1995), Davis and Weinstein (2001) and others were involved in extensive empirical testing on this theory.
However, most are tested on the United States data or tested the HOV model by using data for a
Need essay sample on "International trade"? We will write a custom essay sample specifically for you for only $13.90/page
This paper investigates an evidence to support the HOV model by carrying out a factor content analysis of trade of a single country, Vietnam, which has not been carried out before. Five production factors were taken into account; capital, land, un-skilled labour, semi-skilled labour, and high-skilled labour. Unskilled labor is defined as no education and primary education, semi-skilled labor is secondary education and vocational training, highly skilled labor is university degree. The method for testing this trade theory was based on matrices multiplatinum, resulting in two non-parametric tests, the ‘sign test’ and the ‘rank test’.
In addition, a Spearman’s and Kendall correlation test was computed to check the relevance between the ‘sign test’ and the ‘rank test’ for the case of Vietnam. This paper was outlined into seven sections, section I gives a brief introduction, section II reviews factor content studies. Section III focuses on an economic model specification. Section IV presents the data. Section V describes hypothesis testing. The two tests that are used in this paper to test the HOV theorem for Vietnam. Section VI gives a result of the multifactor-test of the HOV model in the trade between Vietnam and the world.
Section VII presents conclusions and implications. 2 Literature review of the factor content studies The concept of the factor content of trade originated with Vanek (1968). Under some assumption presented hereafters, it can be said that a good will embody fixed amounts of the services of the productive factors, independently of where it is produced. Therefore, trade is regarded as the international exchange of the factors embodied in those goods. Expression of the theory in this form also highlights the logic of the Heckscher-Ohlin theory in its focus on the relative availability of factors (Davis and Weinstein 2001:3).
As presented in detail in Feenstra, Advanced International Economics, (2001: 2-32), the HOV theorem states that a country exports its abundant factors through trade in goods. Since it is possible for a country to be abundant in more than one factor, the HOV theorem states that if trade is balanced a country exports all of its abundant factors through trade in goods. It means that countries tend to export the factor services of their relatively abundant factors and tend to import the factor services of their relatively scarce factors.