Q. The Heckscher-Ohlin model is famous for being elegant and mathematically sophisticated, yet failing to define reality. One manifestation of this fact is Trefler's Case of Missing Trade. Illustrate what exactly is missing. In what sense is it missing? How could you explain why it is missing? How will a relaxation of the identical production functions explain the case of the missing trade?
Answer: Trefler demonstrated that the real volume of world trade is significantly less than that which would be predicted by the Heckscher-Ohlin model. One description is that North-South trade is especially less than would be predicted by a factor proportions model. If technologies be different in the poorer countries then it is possible that the cost of producing a product which uses relatively much of their abundant factor may still be higher than the cost of producing it in the other country.