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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

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Introduction

MIRROR NUERON 1Introduction 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 large number of countries3, calculating the factors of production embodied in a country's exports and imports. Then it was concluded that a country is a net exporter of the factor of production with which it is relatively abundantly endowed, or it is a net importer of those with which it is relatively poorly endowed. There have been few studies on a particular country's trade with the rest of the world or with a single partner. 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. ...read more.

Middle

Compared to the Heckscher - Ohlin theorem, one major advantage of factor content analysis is that it requires less restrictive assumptions. According to Davis and Weinstein (2001a), the multidimensional case of the commodity version states that countries tend to export those goods which require relatively great inputs of their relatively abundant production factors and tend to import those goods which require relatively great inputs of the production factors in which they are relatively poor. Under this less restrictive assumption, the commodity composition of trade flows is not uniquely determined, whereas the factor services incorporated in the exports and imports are uniquely determined. To sum up, empirical studies on the H-O-V theory have a great impact on trade literature. However, there only have been many research conducted for the United States and these studies focused on testing the factor content of trade of many countries though different periods of time. Only a few studies emphasized the trade of a specific country with the rest of the world or with a particular region. This research provides evidence for the HOV theorem by testing the factor content of trade between Vietnam and the world. 3 Data description Data required for testing the H-O-V model are factor contents, factor endowments, trade flows in 1997 for Vietnam and the world. The year 1997 was chosen due to the availability of data. Data for net exports and factor contents of Vietnam was collected from the Social Accounting Matrix 1997 (prepared by Poh Nielsen). The data sources used to construct the SAMs included national accounts statistics, the official 1997 input-output table and COMTRADE trade data. This resulted in a consistent set of National Accounts and labour market data for 33 industries (which were grouped in to nine major sectors in this paper). The classification of sectors was listed in Appendix A. Moreover, the Social Accounting Matrix supplied corresponding details on the wages for total employment in full-time equivalents per industry and for the skilled level categories. ...read more.

Conclusion

Therefore, findings of the 'sign test' and 'rank test' support the H-O-V theorem in trade between Vietnam and the world. 6 Conclusion The HOV theorem on trade between Vietnam and the world was tested by measuring both true and trade-revealed factor endowments. Two non-parametrics tests were conducted, the 'sign test' and the 'rank test'. Since the sign test was completely successful and the rank orders of factor abundance according to both methods of measurement are very similar, the HOV theorem is confirmed. The analysis of Vietnam's factor endowments has shown that Vietnam has factor abundances in land and un-skilled labour, land whereas it has factor scarcities in capital, semi-skilled labour and highly-skilled labour. This implies that Vietnam has a revealed comparative advantage in goods that are intensive in the use of land and un-skilled labour and a comparative disadvantage in goods that are intensive in the use of capital, semi-skilled labour and highly-skilled labour. Therefore, the theory performed well, indicating that the relevant framework may be a reasonable framework for policy studies. In addition, studies of the factor content of trade may help in addressing policy questions of the impact of openness on national income levels and distribution. In fact, there already is a study mapping measures of the factor content of trade into impacts on domestic relative wages for the United States and other members of the Organization for Economic Cooperation and Development (OECD) under some conditions which such a mapping makes sense. This work has been very important in clarifying issues to be addressed in future work. A major area for future work is taking the empirical frameworks favored by the studies of factor content and find out the consequences of international integration on incomes and inequality. To sum up, study on factor content of trade bring out a deep understanding of how resources may drive patterns of trade between a country and other countries, and between a country and a region. ...read more.

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