Applicability of Heckscher–Ohlin model in the real world: A comparative analysis between devloping and developed countries 

Overview:

This report delves into the applicability of the Heckscher-Ohlin (H-O) model in international trade by comparing two economies: the United States (developed) and Ecuador (developing). The H-O model suggests that countries will export goods that utilize their abundant factors of production and import goods that use scarce resources. Our analysis evaluates the model’s relevance across different economic contexts.

Key Concepts:

• Heckscher-Ohlin Model: Posits that countries export products that use their abundant resources intensively while importing goods requiring scarce factors.

• Leontief Paradox: Challenges the H-O model by showing that a capital-abundant country like the U.S. exports more labour-intensive goods than capital-intensive ones.

Hypothesis: 

We hypothesized that the H-O model might be less applicable to developing countries, where capital and labour mobility is often constrained, compared to developed economies like the U.S.

Methodology:

• United States: Data was drawn from sources like the Consumer Expenditure Survey and Input-Output tables to assess sector-specific import and export patterns. The analysis included sectors such as technology, manufacturing, and finance.

• Ecuador: Administrative tax data was used to measure the impact of trade on individual incomes through labor and capital income exposure.

Results:

1. Sectoral Heterogeneity:

   • In the U.S., sectors rich in skilled labor (e.g., tech and finance) benefited from trade, boosting high-skilled wages.

   • In Ecuador, export sectors like agriculture saw wage growth, but industries facing competition from imports, such as small-scale manufacturing, suffered, increasing inequality.

2. Skill-Biased Technological Change (SBTC):

   • In the U.S., technological advancements disproportionately benefited skilled workers, further widening the income gap.

   • Ecuador experienced SBTC, though on a smaller scale, affecting sectors like agriculture and manufacturing.

3. Regional Disparities:

   • In the U.S., urban centers with capital-intensive industries prospered, while rural areas faced challenges from trade competition.

   • In Ecuador, coastal regions with better access to trade outperformed inland regions, widening regional income gaps.

Validity of the Heckscher-Ohlin Model:

• Developed Countries: In the U.S., the H-O model partially holds, but factors like technological innovation and global value chains play a significant role in shaping trade patterns, sometimes diverging from the model’s predictions.

• Developing Countries: In Ecuador, the H-O model’s applicability is limited by factors like institutional constraints and lower technological sophistication, which impact how trade affects the labour market.
  
  

Leontief Paradox:

 Unlike the Leontief Paradox observed in the U.S., where labour-intensive goods were exported despite the capital abundance, our analysis did not reveal a similar phenomenon in Ecuador. However, the study acknowledged the potential for such paradoxes in developing countries.

Conclusion:

 Our research found that while the Heckscher-Ohlin model provides valuable insights, its applicability is nuanced. In developed countries like the U.S., the model holds but is influenced by additional factors such as technological change and factor mobility. In developing countries like Ecuador, the model's relevance is more limited due to market imperfections, regional disparities, and institutional factors.

 This analysis highlights the complexities of global trade and the need to incorporate additional factors like technology, regional development, and sectoral heterogeneity when applying theoretical models like H-O to real-world economies.

As international trade continues to evolve and reshape global economies, further research and refinement of existing theoretical models will be crucial in understanding and addressing the distributional consequences of trade liberalization.