Partial Tests of the HOV Theorem

The statement of the HOV Theorem in (2.1) tells us immediately how a complete test of the theory should by performed simply compute the left-hand side (using data on trade Ti and technology A), compute the right-hand side (using data on endowments Vi and Vw), and compare them. Depending on how well they match up, we can judge whether the Theorem is an empirical success or not. This complete test requires both trade and endowments data for many countries, and technology data for at least one...

Factor Price Equalization

Cone Diversification Grafik

We have already illustrated the gradient vectors aiL, aiK to the iso-cost curves in Figures 1.5 and 1.6. Now let us take these vectors and re-graph them, in Figures 1.7 and 1.8. In the simpler case of Figure 1.7, we have a single equilibrium for factor prices and a single set of labor and capital requirements a1L, a1K and a2L, a2K . Multiplying each of these by the output of their respective industries, we obtain the total labor and capital demands y1 a1L, a1K and y2 a2L, a2K . Summing these as...

Lemma Factor Price Insensitivity

Factor Intensity Reversal

So long as both goods are produced, and factor intensity reversals FIR do not occur, then each price vector p1, p2 corresponds to unique factor prices w, r . This is a remarkable result, because it says that the factor endowments L, K do not matter for the determination of w, r . We can contrast this result with a one-sector economy, with production of y f L, K , wages of w pfL, and diminishing marginal product fLL lt 0. In this case, any increase in the labor endowments would certainly reduce...