A TEST OF THE HECKSCHER-OHLIN

THEOREM ON INDIA

A Thesis

Presented to the

Faculty of

California State Polytechnic University, Pomona

In Partial Fulfillment

Of the Requirements for the Degree

Master of Science

In

Economics

By

Amith Jay Shetty

2014 SIGNATURE PAGE

THESIS: A TEST OF THE HECKSCHER-OHLIN THEOREM ON INDIA EXPORTS

AUTHOR: Amith Jay Shetty

DATE SUBMITTED: Spring 2014

Economics Department

Dr. Carsten Lange ______Project Committee Chair Professor of Economics

Dr. Bruce Brown ______Professor of Economics

Dr. Craig Kerr ______Professor of Economics

ii ABSTRACT

The Heckscher-Ohlin model is a general equilibrium mathematical model of international . The model states that countries will products that will utilize their abundant and cheap factors of productions and import products that utilize the countries’ scarce factors. This paper will test that theory against the data between India and the United States. India is known to be a labor abundant country, which should result in India exporting labor-intensive goods to the United States. Using

126 commodities and labor statistics taken from both countries, this paper will find if the

2009 trade data between India and the United States are consistent with the Heckscher-

Ohlin model.

iii TABLE OF CONTENTS

Signature Page ...... ii

Abstract ...... iii

List of Tables ...... v

List of Figures ...... vi

Introduction ...... 1

Growth of India ...... 2

India and United States Trade Relations ...... 4

Heckscher-Ohlin Model ...... 6

Theory………………………………………………………………………... 6

Model………………………………………………………………………... . 8

Literature Review...... 10

Methodology...... 13

Data…………...... 14

Empirical Testing and Results ...... 15

Conclusion……...... 21

References ...... 23

Appendix A: Export Import Data 2009 ...... 26

Appendix B: Export Import Data 2005 ...... 27

iv LIST OF TABLES

Table 1 Sectoral Breakdown of India’s GDP ...... 3

Table 2 United States and India Country Comparison ...... 5

Table 3 Eviews Statistics on 2009 Data ...... 15

Table 4 Eviews Statistics on 2005 Data ...... 17

Table 5 Eviews Statistics on Manufacturing Sector using 2009 Data ...... 19

v LIST OF FIGURES

Figure 1 India’s Nominal Gross Domestic Product, 2002-2007 ...... 2

Figure 2 Growth in India’s Merchandise and Service Trade 1990-2005 ...... 4

Figure 3 U.S. Merchandise Trade with India, 1958-2006 (U.S. $Billions) ...... 6

Figure 4 Export/Import Ratios vs /Labor Ratios using 2009 Data ...... 17

Figure 5 Export/Import Ratios vs Capital/Labor Ratios using 2009 Manu Only .... 20

vi Introduction

India has been on the rise for emerging markets. A lot of that is due to trade among global leaders like the United States and other European countries. India’s diverse economy includes traditional village farming, modern agriculture, wide range of modern industries and a large amount of services (Martin & Kronstadt, 2007). Today, India and the U.S. share an extensive cultural, strategic, military, and economic relationship (Martin & Kronstadt, 2007). To get an in depth look at the economic relationship between the two countries, this paper will look at the international trade between India and the U.S. One theory that studies the international trade between two countries is the Heckscher-Ohlin theorem. The model states that countries will export products that utilize their abundant and cheap factors of production and import products that utilize the countries’ scarce factors (Kurtishi-Kastrati, 2013). The H-O theorem expands more on David Ricardo’s theory of by predicting patterns of commerce and production based on factor endowments.

This paper will explore on the Heckscher-Ohlin theorem. It will apply the Heckscher-Ohlin model and see if it applies to India exports 2009 trade data. The economies of the United States and India have had different characteristics, but the United States is known as a capital abundant country while India has been labor abundant. One would expect that testing the Heckscher-Ohlin model using the trade data between India and the United States would provide evidence that India exports labor intensive goods. This paper will test the hypothesis that labor abundant India will export labor intensive goods to the United States.

The paper will talk about the growth of India through the years and give a history of the trade relationships between the United States and India. It will include a literature review of some of the notable tests done in the past and the author’s conclusions. After the literature review, empirical testing will be done on

1 import/export data. It will be reviewed for several different sectors between the two countries. The data set will contain a list of 125 commodities and will be divided up by either capital intensive or labor intensive. Labor intensive exports will be analyzed as a proportion of capital intensive exports to determine how the export/import ratio compares to the capital/labor ratio for each commodity for each country. Depending on the results, conclusions will be made on whether the Heckscher-Ohlin model applies to the 2009 trade between India and the United States.

Growth of India

India’s economy is the 10th largest in the world by nominal GDP (Bank, 2013). In the 1990’s, the country began to experience very fast growth as markets

opened for international competition and investment. India is emerging as an

economic power with huge amounts of human and natural resources. Economic reforms and better economic policy in the 2000’s accelerated India’s economic growth rate.

Figure 1 . India’s nominal gross domestic product, 2002-2007

2 In Figure 1 on the facing page (Martin & Kronstadt, 2007) shows India’s nominal GDP for the years 2002 through 2007. India’s GDP grew 24.5 trillion rupees in 2002 to 40.3 trillion rupees in 2006, which is an increase of 64% (Martin & Kronstadt, 2007) . In 2008, India became the world’s second fastest growing major economy(Pasricha, 2008). The reason why India has been growing so fast is because of the expansion of its manufacturing and service sectors. Table 1 (Martin & Kronstadt, 2007) shows the breakdown of India’s real GDP for fiscal years of 1996, 2001, and 2006.

Table 1 Sectoral Breakdown of India’s GDP

This shows the shift from the agriculture sector to the services sector. Even though there is a decrease in the agricultural sector, it is still a very important part of India’s economy. The shift of India’s economy is driven by the rapid growth in the nation’s trade in goods and services. Figure 2 on the following page (Martin & Kronstadt, 2007) shows the increase in both merchandise and services trade from 1990 to 2005. It shows a drastic growth in trade at the beginning of 2000 till 2005. One of the causes of this increase can be attributed to the internet tech boom and the outsourcing of computer services by other countries, one of them largely being the United States.

3 Figure 2 . Growth in India’s merchandise and service trade 1990-2005

India’s economy is largely an internal market with external trade accounting for 20% of the country’s GDP. India’s major trading partners are China, the United

States, the United Arab Emirates, the United Kingdom, Japan, and the European

Union (Tharoor, 2009). This paper will only concentrate on the trade between the

United States and India.

India and United States Trade Relations

In the past, the United States and India have not always had the best relationship. India developed a relationship with the Soviet Union during the Cold War. This caused a huge impact on its relationship with the United States. After the collapse of the Soviet Union, India began to reform its policies and shifted towards the European Union and the United States (Martin & Kronstadt, 2007). The United States is now India’s largest trading partner. In 2009, the United States exported $16.4 billion worth of goods and imported $20.7 billion worth of Indian goods (Census, 2009). In Table 2 on the next page (Narayan, 2010) shows the country comparison between the United States and India.

4 Table 2 United States and India Country Comparison

Table 2 (Narayan, 2010) show vast demographic and population differences in the two countries. Some of the more prominent items that are exported by India to

U.S. are information technology services, textiles, machinery, chemicals, iron and steel products, coffee, and tea. Major American goods that are imported by India include aircraft, computer hardware, and medical equipment (Census, 2009). The

United States is also India’s largest investment partner. Americans have invested over $9 billion into India. The majority of the investment went into India’s power generation, telecommunications, roads, petroleum processing, and mining industries.

The value of merchandise trade between India and the United States has increased over the past 20 years. In 1986, according to U.S. trade statistics, the total value of trade with India was $4.0 billion. By 2006, the total value rose to

$31.9 billion. Figure 3 on the next page (Martin & Kronstadt, 2007) shows the value of U.S. exports to and imports from India from 1958 to 2006.

5 Figure 3 . U.S. merchandise trade with India, 1958-2006 U.S.$ billions

In the mid 1960’s, India provided the United States with 3% of its imports and purchased about 1.5% of its exports. Today, India is a very important supplier of U.S imports. India’s share of U.S. exports has increased. As a result, India was the 21st largest export market for the United States and its 18th largest supplier of imports (Martin & Kronstadt, 2007). Using the trade data between these two countries will give a good indicator on whether the H-O theorem will be valid or not.

Heckscher-Ohlin Model

Theory

The standard Heckscher-Ohlin model begins by expanding the number of factors of production from one to two. The model assumes that labor and capital are used in the production of two final goods. Capital refers to the physical machines and equipment used in production. Machinery, electronics, computers, large equipment are all considered to be capital. The model assumes private

6 ownership of capital. When people use capital for their production it will generate income for that individual. The income that the capital generates is called rents. The workers of the capital earn wages for the production of that capital. The capital owner earns rents. The model assumes that two productive factors allows for differing factor proportions within and across industries (Suranovic, 2010). For example, iron production requires a lot of different machinery and equipment, but they don’t need a lot of labor to work it. This would mean that iron production is capital intensive. An example of a labor intensive product would be harvesting different fruits. There would be a need for a lot of labor and not much capital.

In the Heckscher-Ohlin model, the ratio of quantity of capital to the quantity of labor used in a production is defined as the capital/labor ratio. This means that different industries that produce different goods will have different capital/labor ratios. In the model, each country produces two goods; an assumption must be made as to which industry has the larger capital/labor ratio. For example, if the two goods that a country can produce are steel and clothing and steel production uses more capital per unit of labor than is used in clothing production, then we would say that steel production is capital intensive relative to clothing production. On the other hand, we would say that clothing production must be labor intensive relative to steel (Suranovic, 2010). Different countries have different endowments and labor available for use in the production process. The U.S. has a lot of physical

capital relative to its labor force. Developing countries have little physical capital,

but have a large labor force. We would then use the ratio of capital to labor to

define relative factor abundance between countries. For example, the U.S. has a

larger ratio of aggregate capital per unit labor than India’s ratio. We would then say that the U.S. is capital abundant relative to India. India would have a larger ratio of aggregate labor per unit capital which would make them labor abundant relative to the U.S. The model assumes the only differences between the two countries are

7 the variations in relative endowments of factors of production (Suranovic, 2010).

The Heckscher-Ohlin theorem predicts the pattern of trade between countries based on the characteristics of the countries. It says that a capital abundant country will export the capital intensive good while the labor abundant country will export the labor intensive good (Suranovic, 2010). The reasoning why that will happen is because the capital abundant country produces the good which uses relatively more capital in the production process. As a result, if the two countries are not trading, the price of the capital intensive good in the capital abundant country would go down because there will be extra supply of the good. This will be compared to the price of the same good in the other country. It will be the same situation in the labor abundant country for the price of the labor intensive good. Once you open trade between the two countries, firms will move their products to the markets that will have higher prices. As a result, the capital abundant country will export the capital intensive good since the price will be higher for a short time in the other country. The labor abundant country will export the labor intensive good because the price will be higher for a short time in the other country. The trade will continue until the prices of both goods are equal in both markets (Suranovic, 2010). The theorem tries to explain that excess abundance in goods will cause countries to specialize in that industry and promote trade so they will be able to get higher prices and benefits (Suranovic, 2010).

Model

The H-O model was developed by two Swedish economists, Eli Heckscher and

Bertil Ohlin. They developed the model based on differences in countries resources. The H-O model is based upon that different endowments of resources are the initial reason for foreign trade. There are seven assumptions about the world’s economy that need to be made for the H-O model to be valid (Winters, 1994):

8 1) Consumption functions are the same and the consumers face the same preferences;

2) The production technology is the same in all countries;

3) The production results in constant returns to scale, whereas the marginal returns to any single factor are diminishing;

4) The products are different in their technical requirements of capital and labor per unit;

5) The markets are based on perfect competition;

6) The foreign trade faces no limitations;

7) The resources among the countries are the same among the countries and

their supply is fixed to a certain measure.

The definition of a country being capital or labor abundant which will then produce its intensive goods is based on measuring one country’s total stock of capital compared to its labor force and you compare that with the opposing country’s numbers (Melvin, 1995). If country A is capital abundant against country

B, the ratios of capital per employee can be expressed as Equation 1:

KA/LA > KB /LB (1)

Vice versa, if country A is labor abundant, Equation 2 is used to define the capital to labor ratios:

KA/LA < KB /LB (2)

Since L is the work force in any given country and K is the amount of capital, the analysis of factor abundance and intensity in the process of production of goods that only relative differences cause the foreign trade and total levels of labor and capital stock in countries are immaterial (Juozapavicine & Eizentas, 2010). Even

9 though the predictions of this theory are widely quoted by many economists, the empirical tests are needed to evaluate the fit of the H-O model to the case of India and whether there is a statistical relationship between the export/import ratios and capital/labor ratios.

Literature Review

The Heckscher-Ohlin model has been a very prominent theory of international trade since 1933. From that time, there have been many economists who have tested the application of the theory on international trade data. The most famous test was performed by Wassily Leontief. Leontief, performed a test that analyzed 1947 data of U.S. trade in order to determine if the U.S. was exporting capital intensive goods and importing labor intensive goods as the theory would say. He used input/output tables of U.S. exports and import substitutes. Leontief took 200 industries and broke them down into 50 sectors. He found that exports in 1947 were 30% more labor intensive than import substitutes, leading him to conclude that America was actually exporting labor intensive goods and not capital intensive goods (Leontief, 1953). It was exactly the opposite of what people thought about America’s capital endowments. He was the first one to test the Heckscher-Ohlin model empirically and found results that were opposite to the model itself. Leontief’s results did not prevent the Heckscher-Ohlin model from being a major work in the field for the next three decades. Economists still believed that different endowments for different countries had to influence trade. After some time, people started calling his

findings, the Leontief . This new paradox began many more tests of the

H-O model by other economists and theories on why the theorem didn’t hold up. Leontief came up with the idea that the U.S.’s labor productivity was three times higher than the rest of the world, which means the U.S. was actually a labor abundant country(Leontief, 1953). Tests on later years showed that the paradox was

10 reduced. Here are a few explanations on why the Leontief Paradox occurred. Leontief actually tried to explain the paradox by saying that the U.S. workers were more efficient than foreign workers. This caused the U.S. to export labor intensive goods rather than export capital intensive goods (Choi, 2007). Another explanation that was brought up was the issue of tariffs and transport costs. W.P. Travis said that tariffs might have been the cause for the Leontief Paradox (Choi, 2007). It was then concluded that tariffs do not actually affect the flow, but just the volume of the trade (Travis, 1964). One more explanation that was found as a cause for the paradox is that Leontief did not take into account for human capital. Human capital takes investment, time, and uses up resources (Choi, 2007). Adding human capital into the model would have definitely changed the results of his findings.

There are other studies in the literature that also produced paradoxical results with their trade data. Robert Baldwin used the 1962 trade data and found that U.S. imports were 27% more capital intensive than U.S. exports (Baldwin, 1969). In the 1950’s, Japan was a labor abundant country, Tatemoto and Ichimura did a test and found that Japan’s overall trade was not in line with the H-O model (Tatemoto & Ichimura, 1959). Japan exported capital intensive goods and imported labor intensive goods. When they tested just Japan and the U.S. trade, they found that it was in line with the H-O model. Bharawaj studied India’s trade overall pattern with the world. He found India’s exports were labor intensive which was consistent with the Heckscher-Ohlin theory. When he applied his test with just India and U.S. trade, he found that India was exporting capital intensive goods and importing labor intensive goods. This is not in line with the H-O model (Bharawaj, 1962).

Robert Stern wrote an article about the Leontief Paradox. The article said that when adding a third factor of production the Leontief Paradox disappears because many of the goods Leontief considered to be labor intensive were natural resource intensive (Stern, 1981). In 1987, a group of economists tested the

11 relationship based on the Heckscher-Ohlin-Vanek hypothesis. They used three variables in the test. Those variables are trade, factor endowments, and factor input requirements (Bowen, 1987). They found that when adding a third variable the trade data still does not fit the H-O model. All the literature presented so far show evidence of the Heckscher-Ohlin model not working. Now the paper will present some of the findings that show the model working in specific cases.

Adrian Wood wrote an article that tried to discredit other criticisms about the H-O model. He believes other economists have been wrong in trying to treat capital as similar to land. He says that capital doesn’t influence the flow of trade and decides to compare the trade between developing countries and developed countries based on the skill in the manufacturing trade. He says that more enhanced goods are exported by developed countries and when you take capital out of the model, it actually performs well (Wood, 1994).

Richard Brecher did a test on the trade data between the U.S. and Canada. He performed tests on different variations of the H-O model. Each variation of the model accounted for different factor prices. He found that the model that had the best results was the one that took factor price differences between industries as consequences of imperfect mobility (Clarke & Kulkarni, 2009). Brecher concluded that the data supports the H-O model after you take into account the differences in factor prices(Brecher, 1993).

Peter Schott takes into account factor intensity reversal when running tests on the trade data. Factor intensity reversal describes the way a good can be capital intensive or labor intensive by the mode of production. If a good is produced using automation in a developed country, it will be a capital intensive good. On the other hand, that same good can be considered labor intensive if the production of that good is done by human labor in a developing country (Schott, 2003).

David Clifton decided to use the ratio of Gross Domestic Product per worker

12 vs. Gross World Product per worker. He used this ratio to determine factor abundance in nine countries. David Clifton tested this new ratio and determined that two of the countries were labor abundant while the other seven are capital abundant. When he compared the trade data he found that six trade flows were in line with the H-O model. The other three trade flows were not consistent with the model (Clifton, 1984). This shows that the model does work in specific cases which does make it a relevant theory in international trade.

Even though all the tests that were performed on the H-O model over the years show us a wide range of results for the model, we can still learn a lot about the theory. There have been many economists who have tried to discredit the model, however the theory still remains relevant in economics. As many studies have said, measuring a country’s factor abundance ratio remains very difficult because there is no approach to measuring capital for a country. It is also difficult to measure labor and capital levels within a certain good (Clarke & Kulkarni, 2009). Some people argue with Heckscher-Ohlin’s basic assumptions. They argue that the model is too simple because it assumes that there are no technological differences between countries, which of course we know there are technological differences in different countries. Despite the many criticisms, the model is still useful in international economics.

Methodology

The empirical data analysis is needed to analyze the fit of H-O model to

predict India’s trade with the United States. This paper will concentrate on the

methodology used by Aldona Juozapaviciene and Vilis Eizentas (Juozapavicine & Eizentas, 2010). The model states that developed countries have more capital abundance whereas the developing countries are more labor abundant. This would mean, in our example, India is an emerging country so it is expected to produce and

13 export labor intensive goods and in turn import capital intensive goods from the United States.

The initial test of the H-O model is to provide insights about the trade in the manufacturing, agriculture, textile, and mining sectors. The tests were performed using correlation and regression analysis. The correlation was chosen because of its ability to provide the answer whether the statistical relationship exists. The regression analysis is needed to acquire the function to forecast the foreign trade flows(Juozapavicine & Eizentas, 2010).

In total, 125 commodities in the year 2009 were found in the basic test of H-O model. First, out of the 125 commodities, 43 products were matched between each countries’ imports and exports. The capital/labor ratios will be computed for the commodities which will determine if they are capital intensive goods or labor intensive goods. Second, the export/import ratio will be calculated between the trade data of India and the United States. Correlation and regressions tests will then be computed to see if there is a statistical relationship between the export-import ratios and the capital-labor ratios of all commodities found to be labor intensive. Another model will be looked at using 2005 trade data. The relevance of this test is to see whether the export/import data before the 2008 Financial Crisis had an effect on the results of the model. It will be interesting to see if the strength of the model will either increase or decrease depending on the

time before or after the Financial Crisis. Also further analysis on just the

manufacturing sector commodities will be used to see if any conclusions can come

from those results.

Data

The primary data was taken from the United States Census Bureau website. The 2009 and 2005 foreign trade data for 125 commodities was found for the United

14 States Exports to India and United States Imports from India (Census, 2009). Labor statistics was taken from the Bureau of Labor Statistics for the United States (BLS, 2009) and it was taken from the Ministry of Statistics and Programme Implementation for India (MSPI, 2009). All export/import data is expressed in $U.S. dollars. A full detailed list of the data used can be found in Appendix A and B.

Empirical Testing and Results

The regression estimates were used using Ordinary Least Squares method. OLS is a statistical technique to determine the best fit for a model. The least squares method uses an equation with certain parameters given certain data (Least Squares Method, 2014). A straight line is used to fit through a number of points to minimize the sum of squares of the distances from the points to this line of best fit (Least Squares Method, 2014). The OLS is consistent when the regressors are exogenous, there is no perfect multicollinearity, and when the errors are not heteroscedastic and not serially correlated, and it should be normally distributed (Hayashi, 2000).

In Table 3 on the following page shows the regression estimates of India’s capital/import ratio independent variable and India’s export/import ratio the

dependent variable. There were 26 observations in the sample found to be labor

intensive. These values were used in conjuction with the U.S. trade data in 2009.

The results shows that there is no statistical relationship between those two

variables. The correlation coefficient of the capital/labor variable is 0.03, t-statistic

of 1.75 with a p-value of 0.09. To be a significant variable, one would need a t-statistic of greater than 2 and a p-value of less than 0.05. The model has an adjusted R2 of 0.07. This means that 7% of the variation in the export/import ratio is explained by the capital/labor ratio. After conducting the Breusch-Godfrey Serial

15 Correlation LM Test (Breusch, 1979) , the results indicated an observed R2of 0.96 with a p-value of 0.59 which is more than 0.05, so we cannot reject the null hypothesis. The residuals of this model is not serially correlated. After testing for heteroskedasticity using the Breusch-Pagan-Godfrey (Breusch & Pagan, 1979), the results showed the observed R2 of 0.96 with a p-value of 0.32 which is more than 0.05, so we cannot reject the null hypothesis. This means that the residuals are not heteroskedastic. The next test performed will be used to determine if the residuals are normally distributed. For that test, the Jarque-Bera test was used and we obtained a p-value of 0.00. This means we have to reject the null hypothesis, which says that the residuals are not normally distributed. This is not desirable for the model. Table 3 Eviews Statistics on 2009 Data

The initial test of the original H-O model resulted in no statistical relationship between India’s export/import ratio and capital to labor ratios. In Figure 4 on the next page shows that there is no relationship between those two variables. The regression estimates show that India’s exports are more relatively capital intensive because the function is tending to forcast positive net exports (Juozapavicine & Eizentas, 2010). These results are not good fitted with the H-O model and we can conclude that this model has a very weak predictive power.

16 Figure 4 . Figure 3. Export/import ratios vs capital/labor ratios using 2009 data

For the second test, the same model was used using 2005 trade data. The purpose was to see if there would be a difference between data taken before the 2008

Financial Crisis and data taken after. Table 4 Eviews Statistics on 2005 Data

Table 4 shows the regression estimates of India’s export/import ratio and

17 capital/import ratio using 2005 trade data. In this sample, there were 14 observations that were found to be labor intensive. The correlation coefficient of the capital/labor variable is 0.01, t-statistic of 9.13 with a p-value of 0.00. To be a significant variable, one would need a t-statistic of greater than 2 and a p-value of less than 0.05. The capital/labor independent variable is a significant variable based on the results. The model has an adjusted R2of 0.86. This means that 86% of the variation in the export/import ratio is explained by the capital/labor ratio. After conducting the Breusch-Godfrey Serial Correlation LM Test (Breusch, 1979) , the results indicated an observed R2 of 0.46 with a p-value of 0.79 which is more than 0.05, so we cannot reject the null hypothesis. The residuals of this model is not serially correlated. After testing for heteroskedasticity using the Breusch-Pagan-Godfrey (Breusch & Pagan, 1979), the results showed the observed R2 of 0.03 with a p-value of 0.84 which is more than 0.05, so we cannot reject the null hypothesis. This means that the residuals are not heteroskedastic. The next test performed will be used to determine if the residuals are normally distributed. For that test, the Jarque-Bera test was used and we obtained a p-value of 0.00. This means we have to reject the null hypothesis which says that the residuals are not normally distributed. This again is not desirable for the model. For this to be a good fitted model, we need all the criteria listed at the beginning of the section to be favorable.

18 Table 5 Eviews Statistics on Manufacturing Sector using 2009 Data

In Table 5 shows the regression estimates of India’s export/import ratio and capital/import ratio using 2009 trade data, but only including commodities listed in the manufacturing sector. In this sample, there were 19 observations that were found to be labor intensive. After completing all the tests on this data set, the results showed that this was again not a good fitted m odel. There was some improvement from our initial test as shown by the adjusted R2 of 0.22. It is still not a good fitted model to be used to show the relationship of the export/import ratios and capital/labor ratios.

19 Figure 5 . Export/import ratios vs capital/labor ratios using 2009 data, manufacturing sector only Figure 5 shows a very similar graph to Figure 4 on page 17. It is again showing a positive net exports which shows that this again is not a good model for forecasting. More observations and data are needed to increase the stability of the model. In Juozapavicine and Eizentas paper regarding the tests on Lithuania’s exports, they decided to add two more variables to the model. They added R & D expenditures and intangible assets (Juozapavicine & Eizentas, 2010). By adding these two variables, they improved their model only by a nominal amount and concluded that it increased only because they introduced two more variables and not because they actually influenced the trade (Juozapavicine & Eizentas, 2010). This paper was unable to include those variables due to the unavailability of the data.

20 Conclusion

This paper’s research tried to find out if India’s exports trade patterns were consistent with the theory taken from the H-O theorem. The idea was to see if labor abundant India exported labor intensive goods when trading with capital abundant United States. The results from the paper found that there was no statistical relationship between India’s export/import ratio and its capital/labor ratio using 2009 trade data with the U.S. The second test performed using the 2005 trade data, a time before the 2008 Financial Crisis, between India and the U.S. also yielded no statistical relationship in the model. The model was not a good fit. The third test using 2009 trade data, but only limiting it to commodities in the manufacturing sector also yielded the same results. The results did improve the model, however after conducting tests to see if it was normally distributed, it was found that it was not. Concluding that this was not a good model to use as a predictive model.

Even though the results from this research are inconclusive in finding a good fitted model to predict India’s exports, it does not mean that there is no substantiation for the actual theory. There are limitations in the research that include the lack of cross-sectional data. Finding more refined data in measuring capital and the labor in each country would improve the model. Adding technology to the model would also improve the significance of the model. However, there is also no good way to measure technological levels for companies, which would be a great variable to use when trying to predict the patterns of trade Juozapavicine and

Eizentas (2010). Some inferences can be taken from the 2009 trade data that was used in this research. Of the 43 commodities used, 26 commodities were found to be labor intensive for India. That is more than 50% of the data used. This is in line with our original hypothesis that India is a labor abundant country and most of their commodities should be labor intensive.

The Heckscher-Ohlin theorem will be a theory that will be tested for many

21 years to come. As represented in the literature, testing the theorem using real data has been either a hit or miss with its predictive capabilities. Many economists have added to the original model and developed new theorems for explaining international trade. Some have been met with success and others have not. The underlying foundation though has always been the H-O model. This shows that the H-O theorem is still relevant in today’s economic discussion and will still be used in future research of international trade.

22 References

Baldwin, R. (1969). The case against infant industry protection. Journal of Political Economy, 77 , 295-305. Bank, W. (2013, December). Gdp. Website. Retrieved from

data.worldbank.org/indicator/NY.GDP.MKTP.CD Bharawaj, R. (1962). Factor proportions and the structure of indo-u.s. trade. Indian Economic Journal, 10 , 105-116. BLS. (2009, May). May 2009 national occupational employment and wage estimates

united states. Retrieved from www.bls.gov/oes/2009/may/oes Bowen, H. (1987). Multicountry, multifactor tests of the factor abundance theory.

The American Economic Review, 1 , 791-801.

Brecher, R. (1993). Some empirical support for the heckscher-ohlin model of

production. The Canadien Journal of Economics, 272-285.

Breusch, T. (1979). Testing for autocorrelation in dynamic linear models.

Australian Economic Papers, 17 , 334-355.

Breusch, T., & Pagan, A. (1979). Simple test for heteroscedasticity and random

coefficient variation. Econometrica, 47 , 1287-1294.

Census, U. (2009, May). Foreign trade census. Retrieved from

www.census.gov/foreign-trade/statistics/product/enduse/imports/

Choi, E. K. (2007, November). Leontief paradox. Retrieved from

www2.econ.iastate.edu/classes/econ355/choi/leo.htm Clarke, A., & Kulkarni, K. (2009). Testing the application of heckscher-ohlin theorem to contemporary trade between malaysia and singapore. Journal of Emerging Knowledge on Emerging Markets, Vol 1 Article 10 , 113-128. Clifton, D. (1984). An empirical investigation of the heckscher-ohlin theorem. The Canadien Journal of Economics, 17 , 32-38.

23 Hayashi, F. (2000). . Princeton University Press. Juozapavicine, A., & Eizentas, V. (2010). Lithuania exports in the framework of heckscher-ohlin international trade theory. Economics and Management, 15 , 86-92. Kurtishi-Kastrati, S. (2013). Impact of fdi on economic growth: An overview of the main theories of fdi and empirical research. European Scientific Journal, 9 , 56-77. Least squares method. (2014). Website. Retrieved from

www.investopedia.com/terms/l/least-squares-method.asp Leontief, W. (1953). Domestic production and foreign trade; the american capital

position re-examined. Proceedings of the American Philosophical Society, 97 ,

332-349.

Martin, M., & Kronstadt, A. (2007). India-u.s. economic and trade relations.

Congressional Research Service, 1 , 1-62.

Melvin, S. H. . M. (1995). International economics. New York: Harper Collins

College Publishers.

MSPI. (2009). National data warehouse of official statistics. Retrieved from

www.mospi.nic.in/ Narayan, A. (2010, April). Us-india partnerships: It matters. Retrieved from

http://india-calling-usa.blogspot.com/2010/04/country-comparison india.html Pasricha, A. (2008, June). India now second fastest growing economy. Website.

Retrieved from http://www.australiannews.net/story/366072 Schott, P. (2003). One size fits all? heckscher-ohlin specialization in global production. American Economic Review, 686-708. Stern, R. (1981). Determinants of the structure of u.s. foreign trade. Journal of

International Economics, 1 , 207-224.

24 Suranovic, S. (2010). International trade theory and policy. Flat World Knowledge. Tatemoto, M., & Ichimura, S. (1959). Factor proportions and foreign trade: The case of japan. The Review of Economics and Statistics, 1 , 442-446. Tharoor, S. (2009, March). Resilent india. Website. Retrieved from

http://www.realclearworld.com/articles/2009/03/ Travis, W. (1964). The theory of trade and protection. Cambridge, Mass. Winters, A. L. (1994). International economics. London: Routledge. Wood, A. (1994, May). Give heckscher and ohlin a chance. Review of World Economics, 130 , 20-49. Website. Retrieved from

http://www.wto.org/english/rese/statise.htm

25 Appendix A Export Import Data 2009

26 Appendix B Export Import Data 2005

27