Measuring the factor proportions of India's trade with Sri Lanka using Leontief and Leamer index

Following India's liberalization in early nineties its trade with Sri Lanka grew by 10 per cent per annum during 1993–99. This figure jumped to 47 per cent between 2001 and 2008 following the implementation of the Free Trade Agreement (FTA) between the countries. Given the growing importance of this bilateral trade, the present paper attempts to study the factor content of India-Sri Lanka bilateral trade.

Using the input-output transaction tables of the countries, the paper tests empirically the Heckscher-Ohlin theory for their bilateral trade. Results show that exports from India to Sri Lanka are capital intensive while imports from Sri Lanka are labour intensive. Thus, the results provide evidence to support Leontief paradox in case of India. The paper considers land as a third factor of production. Researchers across the world have shown interest on similar work involving developed and developing countries. But there has not been much work involving two developing countries, particularly involving India. The paper seeks to contribute to this gap and comes up with results that have important implications both for academic and policy-making community.