View article

Heckscher-Ohlin theory has been confounded by empirical contradictions dating back to the paradox unearthed by Wassily W. Leontief. 1 Following the notation and methodology of Jaroslav Vanek (1968), scholars have focused both on goods trade and its relationship to factor abundance (Edward E. Leamer, 1980), as well as the factor content of trade itself (Harry P. Bowen et al., 1987)(BLS). To try to deal with the Leontief paradox in the Heckscher-Ohlin-Vanek (HOV) theory, one can allow for differences in cross-country productivities (Daniel Trefler, 1993). To get an even closer fit, other modifications have been suggested by Trefler (1995) and Donald R. Davis and David E. Weinstein (2001), such as home bias in consumption, nontraded goods, and models without factor price equalization. Still, there remains a huge gap between theory and reality. Trefler (1995) coined the term “missing trade” to depict the extent …