The Basic HOV Theory

Abstract

In a two-country, two-factor, two-commodity trade model, the HO factor proportions theory provides an unambiguous explanation of the international trade pattern: each country will export the good that uses its most abundant factor most intensively in production. In the multi-factor, multi-commodity, multi-country case, when the number of goods exceeds that of factors, the precise commodity pattern of production and trade is indeterminate. However, the factor content of trade is still determinate. One can redefine trade as an implicit flow of factors embodied in commodities. Vanek (1968) was the first to obtain a mapping from commodity space to factor space under special assumptions, among them factor-price equalization. A weaker version of the HO theorem that explains the factor content of trade rather than its commodity composition can, therefore, be proved. However, even though this is more general than the HO theorem, it is not less restrictive in terms of the assumptions needed for its proof.