an strongaccountstrong of global factor trade - columbia university.pdf

An Account of Global Factor Trade By DONALD R. DAVIS AND DAVID E. WEINSTEIN* A half century of empirical work attempting to predict the factor content of trade in goods has failed to bring theory and data into congruence. Our study shows how the Heckscher-Ohlin-Vanek theory, when modified to permit technical differences, a breakdown in factor price equalization, the existence of nontraded goods, and costs of trade, is consistent with data from ten OECD countries and a rest-of-world aggregate. (JEL F1, F11, D5) A central objective of international economic production, absorption, and trade of all coun- research has been to account for the factor tries in the world. This juxtaposition of extraor- content of trade. There are two principal rea- dinary ambition and parsimonious specification sons. The first is that economists want to trace have made these theories irresistible to empiri- the effects of international influences on rel- cal researchers. ative and absolute factor prices within a coun- In recent years, empirical research has fo- try. The Heckscher-Ohlin model and its cused on the Heckscher-Ohlin-Vanek (HOV) variants, with their emphasis on trade arising theorem because of the sharp predictions that from differences in the availability of produc- this theory has for the links between trade, tive factors, provide a natural setting for such technology, and endowments. The HOV theo- investigations.1 rem yields a simple prediction: The net export The second reason for the focus on the factor of factor services will be