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EJCE Year: 2023, December. Volume: 20 - Issue: 2

There is still life in factor proportions model: an evidence from the selected OECD countries

by Hrvoje Jošic, Berislav Žmuk

Start page: 193 - End page: 221

Keywords: Factor proportions model, Sign test, SITC 2, OECD countries

Jel code: F1; F2

DOI: 10.25428/1824-2979/022

Abstract:

The factor proportions model, also known as the Heckscher-Ohlin model, is the main neoclassical model of international trade theory. It was developed by Swedish economists Eli Heckscher and Bertil Ohlin in 1920s and 1930s. According to the factor proportions model a country should specialize in the production and export of products that make use of its relatively abundant factor of production. The factor proportions model was heavily empirically investigated in the last seventy years. The consensus is that although the model is theoretically simple and sound, it empirically fails when confronted with data. The sign test is one of the instruments for testing the factor proportions model. The sign test compares the expected sign of the relative abundance of production factors intensively used in the production of a specific product with the sign of the normalised trade balance. In some cases, the probability of outcomes achieved on the sign test was no higher than the coin toss. The aim of this paper is to introduce new methodology in testing the factor proportions model, Heckscher-Ohlin-teorem precisely, for 33 OECD countries using the SITC 2 classification of products and sign test for the year 2014. The novelty of this new method is in using the normalized trade balance approach instead of calculating net factor content of trade. The main advantage of this approach is simplicity and easier calculation of results. The results of the analysis have shown that the sign test holds in almost 60% of cases for the selected OECD countries.

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