EMPIRICAL TEST OF THE HECKSCHER-OHLIN THEORY BETWEEN NIGERIA AND USA IN 2012
1.1 BACKGROUND OF THE STUDY
The main determinants of patterns of production, specialization and trade among nations are the relative availability of factor endowments and factor intensity (Heckscher-Ohlin, 1933), Bharawaj (1962) and Thompson (2005). According to Kenen (1996), the Heckscher-Ohlin approach to trade theory, also known as the factor endowment and factor proportions approach, is based on two suppositions, namely relative factor endowment and factor intensity. He further argued that goods differ in their factor requirements. For instance, cars require more capital per worker than say furniture or cloth and aircraft require more capital per worker than cars. In other words, goods can be ranked by factor intensity. On the other hand, countries differ in their factor endowments. Some countries have much capital per worker and some have very little. In other words, countries can be ranked by factor abundance. Heckscher-Ohlin model shows that trade between countries is in proportion to their relative amount of capital and labour. In countries with relative capital abundance, wage rates tend to be high; therefore, labour-intensive products e.g. textiles are more costly to produce internally. In contrast, capital-intensive products e.g automobile, cars are relatively less costly to produce internally. Thus the HeckscherOhlin theory predicts that a country will tend to export those commodities that use relatively intensively its relative abundant factor of production, and import those commodities, which use relatively intensively its relatively scarce factor of production. However, Leontief (1953) empirically tested this perspective, and the test was based on the constructed input-output table for the United States in 1947. Leontief’s findings were revolutionary in many ways, however, most importantly because they cast doubt on the Heckscher-Ohlin theory. For instance, one of the findings was apparently at odds with the basic prediction of the Heckscher-Ohlin theory. Leontief reached that paradoxical conclusion that United States of America that possesses a relatively large amount of capital and a relatively small amount of labour in relation to the rest of the world, exported labour-intensive goods. That is, United States did not trade according to the Heckscher-Ohlin prediction.
Although the theory has been largely disproved, yet it is still a useful framework for understanding international trade theory. For instance, Leontief’s result did not prevent the Heckscher-Ohlin model from being the workhorse of international trade theory. This was supported by the work done by Davis and Weinsterin in 1996. They pointed out that economists have strong prior belief that relative factor endowments have much evidence for predicting the patterns of production and trade, and that the Heckscher-Ohlin model is the most sensible way of embodying these
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