Testing the factor content version:

We  can  think of a country indirectly exporting (importing) the services of factors which are  embodied  in its exported (imported) goods. This  is called  the 'factor  content'  of trade. The H-0 model implies that a country should be 'exporting3  (importing) factors for which their factor share is higher (lower) than their income  share.

If  trade  in  goods is an indirect way of trading factors of production,  then relative factor endowments should predict the direction and volume of trade. But the volume of trade is much smaller than what  the H-0 model predicts. Take for example, USA has about 25% of world  income but only 5% of the world's workers. China has only about 3% of  the world income but 15%  of  the world's workers. So a simplistic  factor proportion calculation will say:  through trade, USA should import large amount of labour and China should export most of  its  labour.  But this  is not the case in  reality. This  is  the phenomenon of "missing  trade"  according to Daniel Trefler (1995), which  is explained by dropping the H-0 assumption of identical  technology among countries. Most of these tests, however, fail-to  control for possible differences in tastes across countries. They also do not make much sense in trying to explain the actual pattern of  trade without allowing  for substantial international differences in techrlologies.

Although the empirical evidence on the H-0 model is mixed, the H-0 model provides  an  explanation of the basis of comparative advantage (i.e. what determines it?) and helps  to  analyse the effects of international trade on income distribution.