Introduction

Abstract

Traditional trade theory explains trade only by differences between countries, notably differences in their relative endowments of factors of production. It suggests an inverse relationship between the similarity of countries and the volume of trade between them. The Heckscher-Ohlin (HO) factor proportions theory derives the determinants of comparative advantage in a world of “two-ness” (two goods, two factors, two countries). It predicts that each country will export that good which uses the country’s abundant factor relatively most intensively. The literature on trade offers an impressive number of studies based on the HO theory. The main methodological problems encountered in the literature are: first, the appropriate formulation of the HO theorem in a multi-factor, multi-good and multi-country framework; second, proper tests of the HO theory and proper links of the theory to empirical analysis.