I am having trouble understanding this graph from Trefler 1995 paper 'The case of missing trade'
Ffc = Vfc - Sc(Vfw)
Where Ffc is the factor component of exports
Vfc is the factor endownments of the country
Sc is the ratio of home consuption over world consuption
Vfw is world factor endownments
Epsilonfc on the Y axis is Ffc - (Vfc - Sc(Vfw))
Or in other words the deviations from the Hecksher Ohlin Theorem.
What i don't understand is that the zero trade line is diagonal, shouldn't it be verticle over the point where Vfc - Sc(Vfw) = 0.
Secondly this paper criticises the HO model as performing terribly, but in this graph it seems to be that the deviations from the HO model are all centered around zero, which would seem to suggest a good model. I'm sure i am missing something here.
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- 17-03-2012 22:12
An Original Username
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- 23-03-2012 17:00
Remember that the graph has epsilon on the y axis, not trade. If trade = 0, then the line is positive when (V, etc.) < 0, and vice versa.
The equation of the line is epsilon = F - (V, etc.), so the slope is -1, hence the diagonal line.
I may be wrong in this, since I've only looked at this model for the first time earlier today, but the problem with the H-O-V model in this case is that most of the observations lie on the trade=0 line, regardless of factor abundance or scarcity. Therefore, there is 'missing trade', the subject of the paper, and countries should be trading more than they are, depending on their factor abundance.
Again, might be wrong, but the problems here are economic, not statistical. The H-O-V model should suggest that countries trade more, which is not shown in the empirical evidence.