TESTING HECKSCHER-OHLIN-VANEK THEOREM BY USING NORMALIZED TRADE BALANCE APPROACH

Abstract

The study described here introduces new approach for testing the Heckscher-Ohlin-Vanek (HOV) theorem based on the normalized trade balance concept. The intention was to include in the analysis all countries worldwide but due to the lack of data a certain number of countries had to be excluded. Overall 111 countries were observed according to region and income level for the year 2014. The HOV model was estimated using the sign test. It compared the expected sign of the normalized trade balance or net exports, according to the SITC 2 product classification, with the relative endowment of production factors intensively used in the production of a specific product. Production factors were divided into groups such as produced capital, labour force and natural resources further divided into forests, metals and minerals, oil, coal and gas, pastureland and cropland. Researchers in R&D per million people variable represented the impact of technological differences across countries. The results of the sign test have shown that the HOV theorem held in 55% of cases. The percentage of matched signs was highest for the non-OECD high income countries (75%) and lowest for the lower middle income and low income countries (below 50%).