Extension of the Heckscher-Ohlin Model

The Heckscher-Ohlin model is centered around the idea that relative factor abundance and intensity is what determines the pattern of trade between countries.  As we found in the example of Leontief’s Paradox, this is not always the case.  This paradox has brought attention to economists to create extended versions of the Heckscher-Ohlin model that account for real world situations by assessing more than two goods or factors.  The paper linked to this post does this by examining one of the extended H-O models, created by Romalis, and building on it by using trade data between the U.S. and China from 2000 and 2005.

China is best for comparison to the U.S. because of its large portion of unskilled labor compared to America’s that will manifest in the data.  The author analyzes the trade data for factor intensities by running regressions to see if there is a negative correlation between the factor intensities and the amount of goods China imports from these factors of production.  The finding does hold true to the H-O model prediction that as factor intensity rises, the less China will import in that industry from the U.S.  This is what we would expect in any country based on the H-O model since countries import the good in the sector that they are scarce in that effective factor.

The reason I chose this working paper is to expand on the simplistic idea of the H-O model we learned in class.  I especially like how the use of empirical data solidifies the validity of the H-O model as opposed to the Leontief paradox counterexample.  However, critics of Leontief’s paradox argue that his findings are skewed because of the failure to include more than just labor and capital as well as the distinction of skilled and unskilled labor.  This paper includes both of these, which is why the results were on point with the H-O model.  Although the point of this paper was not to fire shots at Leontief, it does make a valid point of using properly thought out data to test and extend the validity of the ideas in the Heckscher-Ohlin model.