Search

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, a very different conclusion emerges. In particular, in less financially developed economies (South), trade and capital mobility are complements in the sense that trade integration increases the return to capital and thus the incentives for capital to flow to South. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows. [ABSTRACT FROM AUTHOR]

I develop a factor content of trade prediction for the Heckscher-Ohlin-Vanek model (HOV) that relates bilateral differences in country endowments to bilateral differences in factor contents. The results are striking. In comparisons of North-South factor contents or factor contents of countries with very different endowments (e.g., with very different capital-labor ratios), there is clear support for an HOV sign prediction. Thus countries with dissimilar endowment ratios also have very different factor content of trade differences as predicted by the HOV model. [ABSTRACT FROM AUTHOR]

We examine whether two important theories of trade, the Heckscher-Ohlin theory and the increasing returns theory, can account for the empirical success of the so-called gravity equation. Since versions of both theories can predict this equation, we tackle the model identification problem by conditioning bilateral trade relations on factor endowment differences and on the share of intraindustry trade. Only for large differences in factor endowments does the Heckscher-Ohlin model predict perfect production specialization in different countries as well as the gravity equation, and trade is purely in goods produced with different factor intensities. Our empirical analysis yields three findings. First, the predictions of the perfect specialization versions of both theories are rejected by the data and so are unlikely explanations for the empirical success of the gravity equation. Second, a model of imperfect specialization that includes both increasing returns and factor endowments as sources of trade has a mixed performance: it correctly predicts production of more differentiated goods when the level of intraindustry trade is greater; however, the predicted link to factor proportions is tenuous. Third, the predictions of a model with imperfect specialization that relies solely on differences in factor endowments find support in the data. These results suggest that factor endowments and increasing returns explain different components of the international variation of production patterns and trade volumes. [ABSTRACT FROM AUTHOR]

This paper embeds variable effort into a traditional two-sector Heckscher-Ohlin model of international competition. Effort enters a production function as total factor productivity, and on the assumption that effort does not affect capital depreciation, the capital cost savings from high-effort operations are passed on to workers. The labor market thus offers a set of contracts with higher wages compensating for higher effort. This has implications for growth, openness, minimum wages, collective bargaining, public support of education, efficiency of state enterprises, the distribution of wealth, childbearing, and much more. [ABSTRACT FROM AUTHOR]

There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Which is most important in practice? The large volume of intra-OECD trade is frequently cited as critical evidence on this question. It is argued that comparative advantage, unlike scale economies, is incapable of accounting for the large volume of trade between seemingly similar economies. This is a theoretical claim. In this paper, I show that it is possible to give an account of this trade based on comparative advantage. The elements that may give rise to a large volume of North-North trade are traced to identifiable features of technology and endowments. [ABSTRACT FROM AUTHOR]

The factor price equalization hypothesis is widely at odds with the large variation in factor prices across countries. Similarly, the Heckscher-Ohlin-Vanek (HOV) theorem constitutes an incomplete description of trade in factor services: its predictions are always rejected empirically. These two issues are examined using a modification of the HOV model that allows for factor-augmenting international productivity differences. The empirical results are stark: this simple modification of the HOV theorem explains much of the factor content of trade and the cross-country variation in factor prices. [ABSTRACT FROM AUTHOR]

Trade in services has become topical, but little theory has been developed. This paper assumes that one commodity and the services of capital are tradable and examines the traditional trade results. Service trade can produce the same equilibrium as commodity trade, but substantial differences exist depending on whether the tradable commodity is capital or labor intensive. Tariffs on either commodity have the same commodity price effects and will always increase the welfare of the immobile factor labor. Factor income taxes can also affect trade patterns. When both goods and capital services are tradable, there is an indeterminacy in trade patterns, and tariffs, while reducing commodity trade, may not reduce welfare. In this paper I have shown that in a simple model of service trade, the principle of comparative advantage and the Heckscher-Ohlin theorem require interpretations different from those in the standard model. While the export of a factor service in exchange for a commodity, in situations in which both goods continue to be produced in both countries, will produce the same world equilibrium as either commodity flows or factor flows, trade patterns will differ. In particular, if the mobile service is used intensively in the production of the mobile commodity, then the country that is well endowed with the factor K will nevertheless import the K-intensive commodity. One implication of the service trade model is that a service-exporting country will be observed to have a merchandise trade deficit. Such deficits should not be seen as a problem but rather a reflection of a comparative advantage in the service sector. A tax on the export of capital services is shown to produce results identical to those of a tariff. Thus in this model, just as there is an optimal tariff, so is there an optimal tax on the repatriation of foreign earnings. An export subsidy is found to be exactly equivalent to an import subsidy, and both will reduce welfare and deteri... [ABSTRACT FROM AUTHOR]

The article focuses on the Heckscher-Ohlin theorm in the multi-commodity case. Economist Ronald Jones, in his seminal paper on Heckscher-Ohlin theory, has argued that for the case of two countries, two factors and several commodities, the Heckscher-Ohlin theorem would certain valid in the following weak sense: "Ordering the commodities with respect to the capital-labor ratios employed in production is to rank them in order of comparative advantage. Demand conditions merely determine the dividing line between exports and imports, it is not possible to break the chain of comparative advantage by exporting, say the third and fifth commodities and importing the fourth when they are ranked by factor intensity" Furthermore, as Jones had pointed out if transport costs is introduced, the theorem can be revalidated. With transport costs on every commodity, commodity prices would no longer be equal across countries in trade, and therefore factor prices also could not be equalized via commodity price equalization. Thus, while a commodity in the middle of a chain of exportables may be priced out of the export market into being a non-traded good by high transportation costs, it is impossible for it to be turned into an imported good.