1. HO differs from the Ricardian model in that trade occurs because of differences in factor endowments, rather than productivity. It differs from specific-factors in that all factors are mobile.
2. Leontief originally found that, although it is capital-abundant, the U.S. seemed to be exporting labor-intensive goods. Correcting for productivity differences suggests that the U.S. is abundant in skilled labor, so the paradox disappears.
3. HO predicts that abundant factors benefit from trade, while other factors lose.
The Heckscher-Ohlin framework is one of the most widely used models in explaining trade patterns. It isolates the effect of different factor endowments across countries and determines the impact of these differences on trade patterns, relative prices, and factor returns. This approach is a major departure from the view that technology differences determine trade patterns as we saw in the Ricardian model and is also a departure from the short-run specific-factors model that we studied in Chapter 3.
In this chapter, we have investigated some empirical tests of the Heckscher-Ohlin theorem; that is, tests to determine whether countries actually export the goods that use their abundant factor intensively. The body of literature testing the theorem originates in Leontief’s puzzling finding that U.S. exports just after World War II were relatively labor-intensive. Although the original formulation of his test did not seem to support the Heckscher-Ohlin theorem, later research has reformulated the test to measure the effective endowments of labor, capital, and other factors found in each country. Using this approach, we found that the United States was abundant in effective labor, and we also presume that it was abundant in capital. The United States had a positive factor content of net exports for both labor and capital in 1947, which is consistent with the finding of Leontief, so there was really no “paradox” after all.
By focusing on the factor intensities among goods (i.e., the relative amount of labor and capital used in production), the Heckscher-Ohlin (HO) model also provides clear guidance as to who gains and who loses from the opening of trade. In the specific-factors model, an increase in the relative price of a good leads to real gains for the specific factor used in that industry, losses for the other specific factor, and an ambiguous change in the real wage for labor. In contrast, the HO model predicts real gains for the factor used intensively in the export good, whose relative price goes up with the opening of trade, and real losses for the other factor. Having just two factors, both of which are fully mobile between the industries, leads to a very clear prediction about who gains and who loses from trade in the long run.
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