Why and how countries trade has always been a difficult and capital question for economists. The Ricardian model explained trade patterns through differences in labour productivity, however international trade can only partially be explained this way. It has also been wildly believed that resource allocation also plays a vital role in how nations trade, Heckscher-Ohlin (H-O), two Swedish economists, were the first to integrate resource allocation in an economic model of trade now referred to as the Heckscher-Ohlin model of trade. This theory was generally accepted when it was published. However Leontief published empirical data about USAtrading (1953) that was largely inconsistent with the H-O theory of trade. Since then data about what countries trade has been so inconsistent and confusing that there is no real empirical data supporting the H-O model of trade. Thus there are flaws in the original H-O theory; the questions now are : why isn't there any empirical data, and under what conditions is it possible to make the model consistent with reality?

The simplest way to explain this model is by explaining how it works in a two-factor economy (two kind of industries with two kinds of inputs), and what happens when this economy opens to trade with a twin nation.

-W.Staiger "An evaluation of factor endowments and...",SLC

The H-O theory is a very complete instrument that can help if correctly used with the right factors in the right sectors. However it is far from giving us a complete general theory on how countries trade. The limitations thus imposed restrict it mainly to north-south trading, it also helps put into perspective the true role of labour skill in trade patterns as well as the role of technology. The H-O model is not the truth but simply an instrument that can give us an idea what the big picture is.

Another problem is how the different sectors have evolved ; the primary sector depends much more upon natural resource allocation than any other sector. Natural resources are truly immobile and specific to a country thus the H-O model applies quite well to patterns of trade applied to primary goods. On the other hand it is more complicated to compare and set a pattern of inter-sector trade because of the difference between the nature of primary agricultural goods (traded by the south) and industrial goods (traded by the north). This is because agricultural goods prices have a tendency to fall or increase relatively slowly compared to the price of industrial goods who increase rapidly. Thus the benefits of trade implied in the H-O model can be greatly deformed or void.

However it is important to point out that the evidence that arises from the Leontief report against the H-O model must be taken into it's context, the US has a unique status, in the fact that it is the technologically most advanced country in the world which maybe implies that it specialises in exports of relatively new sophisticated products, which are maybe to sophisticated to be produced by capital instead of skill. Thus explaining why it imports more mature products from heavy manufactures that ar

Some common words found in the essay are:
H-O Swedish, EU NAFTA, World War2, North South, HOUADRIA ESSAY, Applying H-O, h-o model, Chance SLC, Finally H-O, h-o theory, model trade, resource allocation, capital intensive, countries trade, comparative advantage, Bibliography Bibliography, natural resources, empirical data, International Edition, comparative advantage capital, trade patterns, h-o model trade, heckscher-ohlin model trade,
Approximate Word count = 1379
Approximate Pages = 6 (250 words per page double spaced)