Impact on trade

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 Crvers 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) . 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 trade in factor k should also be positive ( Fik> 0), and conversely if country i is scarce in factor k if Vik/Vwk< si.

For example, let Ki and Li be the capital and labor endowment of country i, as Leammer (1980) defined that if Ki/Kw >Li/Lw then we say capital is abundant relative to labor in country i. Therefore, Leamer reached a conclusion that the HOV theorem implies that if Ki/Lw > (Ki-Fik)/(Li-Fil) or if capital is abundant relative to labor in country i, the capital/labor ratio embodied in production exceeds the capital/labor embodied in consumption. The right-hand side of this equation reflects the relative true factor endowments of country i,

if the right-hand side is positive for a particular factor k in country i, then the country has a true abundance of this factor. The left-hand side of the equation reflects the trade-revealed factor endowments indicated by a country's net trade, and will be used for the factor content analysis of this paper. If the left hand side of equation (2) is positive, then country i has a revealed abundance of this factor. This implies that country i has a revealed comparative advantage in goods that make intensive use of factor k.

The left-hand side of the equation is corrected for the trade balance, so that a country with for example a positive trade balance has both positive and negative trade revealed factor endowments. The relationship between the true factor abundance and the trade-revealed factor abundance is a consequence of the HOV theorem, which implies that countries that have an abundance of a particular production factor k should have net exports of the factor services of factor k. The last fifteen years have seen wide swings in trade economists' views of models of the factor content of trade.

Pioneer studies were made by Leamer (1980 and 1984), Bowen, Leamer and Sveikauskas (1987) and Maskus (1985). It was not so easy to see that this represented only a phase in the development of the literature of the trade theory. More recent studies, such as Trefler (1995) performed the signal service of identifying anomalies in the data which further research could aim to understand. The most recent studies, such as Davis and Weinstein (2001a), have been much more positive for amended versions of the theory.

These studies explained the patterns of trade, especially exploring a paradox called Leontif Paradox. Wassily Leontief6 (1953) computed the total input requirements and capital and labour per unit of US exports commodity and US imports commodity. His results showed that the US exported labour-intensive goods and imported capital intensive ones, though the US was generally considered as a capital abundant country relative to all trading partners. Leontief paradox has stimulated many studies which tried to explain this paradox.

Leamer (1980) recognized the trade surplus reality of the data. His analysis was based on the HOV model (and theorem with many factors and goods). In Leamer's view (Leamer (1984) and Leamer and Levinsohn (1995), Leontief had performed the wrong test! That is, even if the HO model is true, it turns out the capital/labor ratios in export and imports should not be compared. Instead, an alternative test should be performed: factor content of US production and consumption should be used instead of import and export factor content.

By using this test, Leamer was successful in explaining the reality of the US trade base on the H-O-V model, and his result was a precise application of the H-O-V model. (Leamer, 1980. 'The Leontief Paradox reconsidered', Journal of Political Economy, 88: 495-503) Factor content studies since then increasingly tended to be multi-country studies based on the Heckscher-Ohlin-Vanek (HOV) theorem equating factors embodied in net trade to excess factor endowments. Empirical HOV studies used impressive data sets on exports, imports, factor endowments and technology for a large number of countries.

Leamer (1984) and Sveikauskas (1987) used 1967 data on 12 factors and 27 countries. They tested sign and rank propositions derived from the HOV theorem, but found only modest support for the factor proportions model. Trefler's (1993, 1995) examination of 1983 data on 10 factors and 33 countries accounting for 76 percent of world exports found zero factor content in net trade. 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.