TESTING THE FACTOR PROPORTIONS MODEL FOR CROATIA

Abstract

The factor proportions model is one of the main models in international trade theory. It was developed by Swedish economists Eli Heckscher and Bertil Ohlin in the early 1920’s. Based on the merchandise trade data between Croatia and the countries of the European Union and the world and the relative availability of key factors of production, the factor proportions model was tested in the case of Croatia. The sign test was used for this purpose. It compares the expected sign according to the factor proportions model with the sign of the revealed comparative advantages index (RCA). The results of the analysis showed that the factor proportions model does not apply in the case of Croatia. According to the factor proportions model, Croatia does not use its comparative advantages effectively due to the lack of specialization in the production of products which intensively use the country’s relatively abundant factor of production. Limitations of the model are reflected in the fact that some of the assumptions of the factor proportions model are not satisfied.

Keywords

• factor proportions model
• Croatia
• SITC
• sign test