Comparative advantage in international trade

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Traditional trade theory explains trade through differences between countries, particularly in their relative endowments of production factors. It posits an inverse relationship between the similarity of countries and their trade volume. The Heckscher-Ohlin (HO) factor proportions theory identifies determinants of comparative advantage in a simplified world of two goods, two factors, and two countries, predicting that each country will export the good that utilizes its abundant factor most intensively. Numerous studies have been based on the HO theory, yet significant methodological challenges persist. These include formulating the HO theorem in a multi-factor, multi-good, and multi-country context, and effectively testing the theory against empirical data. The theory's relevance has been questioned as modern trade facts have shown inconsistencies with its framework. Notably, Leontief's 1953 test of the factor proportions theory using 1947 US data revealed that the US exported more labor-intensive goods than it imported, contradicting expectations based on factor endowments. This "Leontief Paradox" raised doubts about the relationship between actual trade patterns and theoretical predictions, sparking extensive debate over the empirical application of the factor proportions theory.