Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works.

Abstract

The Heckscher-Ohlin-Vanek (HOV) model of factor service trade is a mainstay of international economics. Empirically, though, it is a flop. This warrants a new approach. The authors test the HOV model with international and Japanese regional data. The strict HOV model performs poorly because it cannot explain the international location of production. Restricting the sample to Japanese regions provides no help, inter alia giving rise to what Daniel Trefler calls the 'mystery of the missing trade.' However, when the authors relax the assumption of universal factor price equalization, results improve dramatically. In sum, the HOV model performs remarkably well. Copyright 1997 by American Economic Association.

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