Thursday, 27 October 2016

Testing the general validity of the Heckscher-Ohlin theorem

The Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model. Simply put it states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In the two-factor case, it states:"A capital-abundant country will export the capital-intensive good, while the labour-abundant country will export the labor-intensive good".

In the current issue of the American Economic Journal: Microeconomics (8(4), November 2016: 54–90) Daniel M. Bernhofen and John C. Brown have a paper which aims at Testing the General Validity of the Heckscher-Ohlin Theorem. The abstract reads:
We exploit Japan’s mid-nineteenth century transition from autarky to open trade to test Alan Deardorff’s (1982) seminal and parsimonious autarky price formulation of the Heckscher-Ohlin theorem. Factor price data from Japan’s late autarky period impose a refutable restriction on Japan’s factor content of trade. Our data are constructed from many historical sources, including a major Japanese survey of agricultural techniques and a rich set of nineteenth century comparative cost studies. Evaluating Japan’s factor content of trade during 1865–1876 under alternative theoretical assumptions about technology, we provide robust evidence in favor of the Heckscher-Ohlin hypothesis
The paper's conclusion states,
The Heckscher-Ohlin theorem is one of the central general equilibrium propositions in economics. It predicts that the direction of trade is explained by differences in countries’ relative factor scarcity. In Bertil Ohlin’s (1933) original formulation, relative factor scarcity is measured by countries’ autarky factor prices. A long line of research that applies comparative statics methodology to international trade has shown that Ohlin’s (1933) conjecture on the relationship between autarky factor prices and the pattern of international trade can be formulated as a refutable hypothesis. This was initially accomplished for the two-country, two-factor, wo-commodity world familiar from undergraduate textbooks in international trade. Subsequent research by Deardorff (1982) and Neary and Schweinberger (1986) has formulated a refutable Heckscher-Ohlin proposition for a single economy that holds under general conditions regarding dimensionality and assumptions about the economy’s trading partners.

We argue that Japan’s economy before and after its nineteenth century move from autarky to free trade conformed to the critical assumptions of this autarky price formulation of Heckscher-Ohlin. The historical sources allowed us to construct technology matrices based on disaggregated data of input requirements for traded goods at the location of production. Combining these data with matching commodity trade flows and autarky factor prices enabled us to test the general validity of the Heckscher-Ohlin hypothesis. We were not able to reject the hypothesis in any of the sample years. This is certainly good news for the neoclassical trade model and for those who have contributed to its formulation since Ohlin.
So one up for traditional trade theory.

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