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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MIRROR NUERON

Introduction

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. Unskilled labor is defined as no education and primary education, semi-skilled labor is secondary education and vocational training, highly skilled labor is university degree. The method for testing this trade theory was based on matrices multiplatinum, resulting in two non-parametric tests, the 'sign test' and the 'rank test'. In addition, a Spearman's and Kendall correlation test was computed to check the relevance between the 'sign test' and the 'rank test' for the case of Vietnam.

This paper was outlined into seven sections, section I gives a brief introduction, section II reviews factor content studies. Section III focuses on an economic model specification. Section IV presents the data. Section V describes hypothesis testing. The two tests that are used in this paper to test the HOV theorem for Vietnam. Section VI gives a result of the multifactor-test of the HOV model in the trade between Vietnam and the world. Section VII presents conclusions and implications.

2 Literature review of the factor content studies

The concept of the factor content of trade originated with Vanek (1968). Under some assumption presented hereafters, it can be said that a good will embody fixed amounts of the services of the productive factors, independently of where it is produced. Therefore, trade is regarded as the international exchange of the factors embodied in those goods. Expression of the theory in this form also highlights the logic of the Heckscher-Ohlin theory in its focus on the relative availability of factors (Davis and Weinstein 2001:3).

As presented in detail in Feenstra, Advanced International Economics, (2001: 2-32), the HOV theorem states that a country exports its abundant factors through trade in goods. Since it is possible for a country to be abundant in more than one factor, the HOV theorem states that if trade is balanced a country exports all of its abundant factors through trade in goods. It means that countries tend to export the factor services of their relatively abundant factors and tend to import the factor services of their relatively scarce factors.

The assumptions of the HOV model are:

(i) perfect competition in the goods, immobility of production factors between countries, but complete mobility of production factors between sectors within a country.

(ii) identical input-output (technology) in all countries

(iii) production functions shows constant returns to scale

(iv) factor price equalization across countries

(v) No factor intensity reversal4

(vi) equal numbers of factors and goods

(vii) Identical homothetic utility functions in all countries.

(viii) Full employment of the production sectors.

In particular the assumptions of identical technology (identical input-output relations) and factor price equalization across countries may be crucial for the relevance of the HOV model. Deardorff (1982) shows that if both of these assumptions are met, factor intensity reversals cannot occur. These eight assumptions of the HOV model are more valid for a group of industrialized countries than for a mixed group of industrialized and developing countries5. Therefore the HOV model may usefully be applied to a group of industrialized countries, as in for example Cörvers and De Grip (1997) and James and Elmslie (1996). Moreover, models assuming constant returns to scale, such as the HOV model, must be distinguished from models that allow for economies of scale. Economies of scale are relevant for explaining intra-industry trade between industrialized countries (see also Deardorff, 1984). Following Leamer (1984), who also uses the HOV model, this paper does not incorporate such economies into the model because the model explains net trade, i.e. exports minus imports, instead of exports and imports separately. As for other assumptions of the HOV model, Leamer concludes that, if the above assumptions with regard to trade impediments, international factor mobility, non-traded and intermediate goods, transportation costs, factor market distortions and consumer preference dissimilarities are not fulfilled, outcomes from the HOV model are not seriously affected. Moreover, the results of the HOV model are less distorted by trade barriers now than they once were, as the barriers are gradually broken down by free trade agreements.

The theoretical framework of the factor content studies is defined as: Let Yi, Di, Ti represent the (nx1) vector of outputs in each industry, vector of demands of each good and vector of net exports for country i, respectively, so that Ti = Yi - Di. Let (mxn) matrix A=[ajk]' be input-output matrix, in which m represents the number of production factors that are internationally perfectly immobile. This leads to an equation in which factor services embodied in net exports are equal to the difference between the supply of factor services and the use of factor services, thus ATi = A(Yi - Di)

Define Fi as the mx1 vector of factor of net trade, which equals ATi by definition. Moreover, define Vi as the vector of factor endowments of country i, which equals AYi by definition. Finally, the factor content of consumption equals the share that country i uses from the mx1 vector of total world factor endowments, Vw. This share equals the share of national income, corrected for the trade balance B, in total world income. In other words, s = (GDPi/GDPw) .
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This equation can be rewritten as follows:

Fi = ATi= Vi - sVw (1)

which is a statement of the Heckscher-Ohlin-Vanek (HOV) Theorem. In terms of individual factors, this is written as Fik = Vik - siVwk. HOV theorem specifies a relationship between factor content of trade and factor endowments. It can be interpreted that if country i's endowment of factor k relative the world endowment exceeds country i's share of world GDP (Vik/Vwk>si), then we say that country i is abundant in that factor. In that case, the above equation says that the factor-content of ...

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