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Is skill dispersion a source of comparative advantage? In this paper we use microdata from the International Adult Literacy Survey to show that the effect of skill dispersion on trade flows is quantitatively similar to that of the aggregate endowment of human capital. In particular we investigate, and find support for, the hypothesis that countries with a more dispersed skill distribution specialize in industries characterized by lower complementarity of workers' skills. The result is robust to the introduction of controls for alternative sources of comparative advantage, as well as to alternative measures of industry-level skill complementarity. ( JEL F14, F16, J24, J31) [ABSTRACT FROM AUTHOR]

We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model, a firm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payoffs from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies, and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity differences across countries with different contracting institutions, and that differences in contracting institutions lead to endogenous comparative advantage differences. (JEL D86, O33) [ABSTRACT FROM AUTHOR]

This paper examines how factor proportions determine the structure of commodity trade. It integrates a many-country version of a Heckscher-Ohlin model with a continuum of goods with Paul R. Krugman's (1980) model of monopolistic competition and transport costs. The commodity structure of production and bilateral trade is fully determined. Two main predictions emerge. Countries capture larger shares of world production and trade of commodities that more intensively use their abundant factors. Countries that rapidly accumulate a factor see their production and export structures systematically shift towards industries that intensively use that factor. Both predictions receive support from detailed trade data. [ABSTRACT FROM AUTHOR]

This paper introduces a new technique for testing the Heckscher-Ohlin model that allows for the possibility that countries with sufficiently disparate endowments specialize in unique subsets of goods. Results based upon industry-level data reject one-size-fits-all homogeneity in favor of Heckscher-Ohlin specialization. Results also reveal that industry-level data hide substantial intra-industry heterogeneity, violating the assumptions of the model and complicating the interpretation of results from earlier research. A methodology for adjusting industry output to reflect underlying product variation is introduced. Reestimation of the model using adjusted aggregates in place of standard industry classifications provides strong support for Heckscher-Ohlin specialization. (JEL F11, F14, F2, C21) [ABSTRACT FROM AUTHOR]

The authors illustrate how it is possible to implement a test circa 1913 of the Heckscher-Ohlin-Vanek (HOV) theory. In the HOV model, there remains a huge gap between theory and reality--a term Daniel Trefler (1995) coined the 'missing trade' to depict the extent to which measured trade is still negligible compared to the prediction of the pure theory. The HOV model lacks solid empirical evidence; therefore the authors use today's refined empirical skills to go back in time to test the model in its original context. The pre-1914 period makes a potentially better laboratory for testing pure trade theory compared to today. The authors found that for labor and capital the fit of the model is close to nonexistent. For resources, there is evidence that the model fits really quite well. Introducing extensions to the model, the fit is much improved by a Leontief-style productivity correction, but the results of a home-bias correction appear, in many cases, quite implausible. In conclusion, the authors found that the HOV model seems to work as well in its own time as it does today--that is, not very well at all.

Author Daniel Trefler offers a reply to the comment presented by Patrick Conway concerning the Heckscher-Ohlin-Vanek (HOV) model. Conway's major finding was that the HOV model performs much better for some categories of labor than for others. Trefler argues that Conway did not explore this finding as deeply as he should have. Trefler analyzes the Werner Antweiler and Trefler (2002) data on the educational content of trade. This analysis illustrates that the performance of the HOV model displays skill bias and capital-skill complementarities both in levels and in changes. Trefler also argues that Conway's factor-mobility explanation is inadequate and therefore offers evidence strongly supporting an alternative, human-capital explanation in its place.

Author Patrick Conway comments on the 'mysteries' identified by Daniel Trefler of the Heckscher-Ohlin-Vanek (HOV) model when examined empirically. Conway proposes alternative explanations for the mysteries that Trefler identified. He indicates the features of the data that lead to the mysteries and provides an intuitive separation of the mysteries into those observed in the pattern of trade and those observed in the volume of trade. Conway suggests that his comment offers three specific contributions. Taken together, they suggest that theories designed to explain observed trade patterns and volumes should reexamine the proxy for factor scarcity derived in the HOV model and should allow for the impact of factor-specific differences in the domestic mobility of factors of production.

Ever since economist David Ricardo demonstrated how free trade in consumable wine and cloth between Portugal and England could improve real incomes in both places as contrasted with self-sufficiency autarky, comparative advantage has been one of political economy's most cherished and useful principles. In recent years, as in economist Ronald Jones' Stockholm, Sweden 2000 Ohlin Lecture, there has been a widening and deepening of interest in the direction of studying how movements of inputs as well as of final outputs will change the simplest Ricardian findings. The present article provides a dramatic, and easily in manageable, scenario which merges 1817 Ricardo with 1960 economist Piero Sraffa's Production of Commodities by Means of Commodities. Much of 1817 wisdom remains; but new results emerge, quantitatively and qualitatively. According to the author, Ricardo asserted baldly that the main preoccupation of political economy was to analyze how the total of social income gets allocated among the wages of workers, the interest of capitalists, and the rents of landowners. Even if with one regard this as only one of several important goals, one can agree that it is indeed a major object of study.

Recent research is giving shape to a new generation of Heckscher-Ohlin-Vanek (HOV) thinking. The core of this new thinking is a class of HOV predictions that allow for international differences in technology and choice of techniques. The literature is in the process of rapid evolution. As a result, the key questions tend to get lost. The first one is what empirical regularities account for the poor performance of the HOV model? Second, are there alternative assumptions about technology that lead to better test results for the model? The third and most important is whether the HOV model provides a useful framework for thinking about international technology differences. In spite of the defects of the model, the answer is a definite 'yes.'

Over the last two decades, unskilled workers in the U.S. and Europe have been experiencing stagnating or declining real wages and higher rates of unemployment. Technological change, increased international trade with low-wage developing countries, educational failures, and immigration of unskilled workers have all contributed to these undesirable outcomes. An implicit or explicit model of the labor market is required to estimate the separate and interactive effects of these four forces and to design appropriate policy responses, if any. One plausible model that links external product markets to internal labor markets is the Heckscher-Ohlin-Samuelson general equilibrium model. This model operates over a time period that is long enough to allow costless detachment of workers and capital from their original sectors. According to this model, the news of the recent economic liberalizations in Asia, Europe, and Latin America is carried to the U.S. and European labor markets by declines in prices of labor-intensive tradables. These price reductions twist the labor demand curve, dictating lower real wages for unskilled workers who reside in communities with abundant unskilled labor, but raising the wages for unskilled workers who are fortunate to live in communities inhabited mostly by skilled workers.

The most popular framework for analyzing the trade-wage linkage is the Heckscher-Ohlin-Samuelson model (HOS), with the celebrated Stolper-Samuelson theorem. Consider two regions the U.S. and the developing countries and two factors of production such as low-skilled and high-skilled workers, or alternatively, low-educated and highly educated workers. High-skilled workers are abundant in the U.S. low-skilled workers are abundant in DC. There are two goods, one skill-intensive in production, and the other low-skill-intensive. HOS theory predicts that, upon an opening of trade between the U.S. and DC, either because of an elimination of protectionism or a fall in transport costs, the following will occur such as the U.S. will export the high-skilled-intensive product and import the low-skilled-intensive product. The relative price of the low-skilled-intensive product will decline in the U.S. The wage of low-skilled labor relative to that of high-skilled labor will decline in the U.S. and employment will shift to the high-skilled-intensive output. Firms in both sectors in the U.S. in response to the falling relative wage of low-skilled workers will raise the proportion of low skilled to high-skilled workers. The HOS theory underlines the linkage between relative output prices and relative wages. In the simple two-sector, two-skill factor model, without specialization, there is a one-to-one relationship between output prices and factor prices, the relative wage of unskilled labor falls if and only if the relative price of low skilled intensive output declines.

The Heckscher-Ohlin-Vanek (HOV) theorem, which predicts that countries will export products that are made from factors in great supply, performs poorly. However, deviations from HOV follow pronounced patterns. Trade is missing relative to its HOV prediction. Also, rich countries appear scarce in most factors and poor countries appear abundant in all factors, a fact that squares poorly with the HOV prediction that abundant factors are exported. As suggested by the patterns, HOV is rejected empirically In favor of a modification that allows for home bias in consumption and international technology differences. [ABSTRACT FROM AUTHOR]

Economic landscape is complex, in its context of representing dynamics of resource allocation across activities and locations. Complexities arise out of common but significantly reasonable issues like relative importance of increasing returns versus comparative advantage in international trade. Most models in international trade can be thought of as determining the allocation of resources in each country among a number of activities, like the Heckscher-Ohlin method that counts for allocation of labor between wheat and wine, and capital between two countries X and Y. The theme of the complexity of an abstract economic landscape arises very naturally in "new economic geography" models of the type that have become increasingly popular. The article discusses an economic model that presents the allocation of the manufacturing work force among three international locations. The allocation has been represented in a graphical pattern, and following discussions illustrate the resolution of complexities as envisaged.

Trade theorists have provided rigorous and elegant models generating intraindustry trade. The traditional Heckscher-Ohlin model of international trade suggests that international trade is motivated by differences in countries' factor endowments. Advocates of this approach have noted that intraindustry trade may just be trade in goods with similar uses but different factor contents. Hence, classical trade theory can explain intraindustry trade. More recently, trade theorists have focused their attention on models in which industry structure generates product differentiation. Economist Paul Krugman first generated a model in which monopolistically competitive firms produced differentiated products with an increasing returns to scale (IRTS) technology. The empirical success of models in which product differentiation generates intraindustry trade seems not terribly informative. The evidence in this article suggests that perhaps something other than trade in differentiated products of IRTS industries is generating intraindustry trade.

This article focuses on factor-supply differences as a source of comparative advantage. The amount of intraindustry trade represents a more troubling attack on the Heckscher-Ohlin model. Another observation of the same type is the recent increase in trade relative to gross national product among the industrialized countries which has come at a time when these countries seem to be getting more similar in their supplies of capital per worker. Though these and other empirical findings are troubling, they are very far from adding up to a rejection of the Heckscher-Ohlin model. Gross exports and gross imports are also more difficult to understand, as is the level of intraindustry trade. To make progress, economists ought to abandon the idea that models are either true or false in favor of the notion that models are sometimes useful and sometimes misleading. A pure factor-proportions model would not be very useful for studying the free-trade agreement between Canada and the U.S., since economies of scale will play an important role in determining the regional division of manufacturing in an integrated free-trade area combining these two high-wage countries.

The article derives a corresponding weak regression hypothesis which simply states that, on average, the ordinary least squares-estimated coefficients of interactional regression models will carry the intuitively expected positive signs. Regression tests of the Heckscher-Ohlin Theorem normally suffer from the limitation of the traditional commodity version to the abstract case of two factors, two goods, and two countries. Deardorff's general form of the theorem depicts a weaker version of the factor proportions hypothesis stating that, on average, countries will be net exporters of those goods that are intensive in the adoption of abundant factors of production.

Despite a number of attempts to extend it, the Heckscher-Ohlin Theorem remains woefully restricted in terms of the generality of the assumptions needed for its proof. The purpose of this article is to provide statements and proofs of the Heckscher-Ohlin T

The trade literature is replete with Vanek-type theorems which provide a simple, straightforward link between a nation's net (indirect) trade in factor services and her relative factor abundances. Of course, since factor services are traded only to the extent that they are embodied in commodities, there must also exist a further intimate connection, through factor intensities in production, to direct commodity trade. Nonetheless, with arbitrarily many factors, the link to commodity trade, which Vanek-type theorems necessarily imply is neither so simple and straightforward, nor, for that matter, particularly illuminating. The author prepared a paper in 1978 which was concerned, primarily to characterize the missing link between commodity and factor-service trade and thereby, between commodity trade and relative factor abundances in a form which preserves the spirit of the Hecksher-Ohiln Theorem from simpler, two-factor worlds. As a practical matter, the author was also concerned to operate within the context of a set of assumptions, which would permit direct empirical implementation of the model.

Economist Jon Harkness suggests a method for testing the Heckscher-Ohlin factor abundance theorem with trade data from a single country. The Heckscher-Ohlin model implies that there is a special set of mathematical relationships among trade, factor intensities and factor abundance. A legitimate test of this model requires independent measures of these three concepts, and a subsequent computation of the extent to which these data violate the hypothesized set of mathematical relationships. However, an analysis such as Harkness', which uses measures of only two of these concepts, can be used to infer the third concept, but cannot be said to be a test of the model. Moreover, on the production side, the Heckscher-Ohlin relationships are a set of identities. The content of the theory derives from the assumed constancy of the factor intensities across countries which imply relationships among commodity out-puts and factor inputs for all countries. It is of course impossible to test the constancy of factor intensities across countries with reference to data from a single country, and no test of the theory can rest on data from one country alone.

The article discusses market economics. It has been demonstrated that under a class of economically plausible assumptions about dynamic adjustment,a number of comparative static paradoxes which have attracted attention in the literature on factor-market distortions are associated with unstable equilibria. This association has been shown to hold in both the two-sector Heckscher-Ohlin model of a small, open economy producing two traded goods, and the two-sector model with commodity prices determined endogenously. By a standard application of Samuelson's Correspondence Principle, these paradoxes can effectively be ignored since they will almost never be observed in either model. The stability conditions for the two models are different, but in attaching primacy to stability of one model rather than the other, the most applications of the Correspondence Principle can be questioned. The essence of this principle is to make explicit the process by which a particular comparative static result does (or, in this case, does not) come about, on the grounds that if such a result is to be of economic, it must refer to a specific temporal or causal sequence.

Over the past few years, a great deal of effort has been devoted to expanding and testing the factor-proportions trade model and to identifying abundant factors of production of the U.S. The article examines the theoretic relationship between net commodity trade and net factor service trade and relative factor abundances. First, it shows that a nation's relative factor abundances can be determined from its' net flows of factor services through trade. This is conveniently referred to as the theorem related to economists Jaroslav Vanek and Trent Bertrand. The article shows precisely how the theorem can be used to estimate relative factor-abundance ranking of the U.S. Second, by use of a linear regression equation, it shows how net commodity exports can be predicted from knowledge of the intensity of use of factors in producing such commodities. It is argued that a ranking of the coefficients on each factor intensity in the regression equation will duplicate a ranking of the corresponding relative factor abundances. This latter result is called the Heckscher-Ohlin Theorem.

The Heckscher-Ohlin model has lost credibility as a positive instrument of analyzing the U.S. international trade. The prime cause is its persistent indication of a direction of U.S. comparative advantage in international trade which is the converse of that which informed observation suggests ought to result from a relative capital-labor factor proportions test of U.S. data. In his pioneering studies, Wassily Leontief using the 1947 input-output structure with both 1947 and 1951 trade data found exports relatively labor intensive, and import-competing production relatively capital intensive. Robert Baldwin employing the 1958 input-output structure and 1962 trade data reaffirmed the Leontief paradox. This paper continues in the tradition of the Leontief-Baldwin studies by investigating the Heckscher-Ohlin Theorem and U.S. trade on the basis of the 1963 and 1967 input-output production structures and concurrent trade flows; the methods differ from the previous studies in that it employs energy as a reference factor of production. Although strictly speaking energy is a produced factor of production, the paper does not treat it as an intermediate good. Rather it views it as a nonproduced input symmetric with labor and capital. As such, the article focus on the raw material content of energy inputs.

This article intends to show that most of the traditional trade theorems may not hold without additional provisions if such intermediate products are introduced in the model as are produced solely to serve as inputs in production of final goods. This article also provides a theory explaining the basis of trade in intermediate products. In the traditional two final commodity trade model, we introduce a third good which is produced by primary factors only to serve as an input in the other two commodities. It is fashionable to attempt to explain the pattern of trade between two countries in terms of the Heckscher-Ohlin theorem: a country exports the commodity which uses intensively its relative abundant factor, and imports the commodity which is intensive in the use of its relatively scarce factor. Traditionally, the logical validity of this theorem has been shown to depend crucially upon the validity of the Stolper-Samuelson and the Rybczynski theorems. Unfortunately, in our model where three goods are produced, the pattern of trade turns out to be indeterminate if all three goods are to be traded, even if the Rybczynski and the Stolper-Samuelson theorems hold unambiguously. If one of the three goods is nontraded, not only do we solve the indeterminacy problem in the model, but we can also salvage the Heckscher-Ohlin theory.

It has long been recognized that commodity movements and factor movements are, to a degree, substitutes for each other in international exchange. Yet, until recently, the dominant theory of international trade, the Heckscher-Ohlin (H-U) model, had been rather thoroughly analyzed under the rigid assumption of the immobility of factors. Only in 1957, with the publication of economist Robert Mundell's important article, was capital mobility in an H-O model explored. This paper presents a fuller treatment of capital mobility in the H-O model. The article author discusses the model under conditions of tariffs on goods flows and taxes on capital relocations. Nations may trade by exchanging goods or by exchanging their relatively abundant factors which produce those goods. This article demonstrates that the substitutability between these two avenues of exchange continues to hold even under conditions of tariffs and taxes. The dynamics and equilibria are demonstrated, showing that a nation will pay for its imports either through exports of goods or through earnings on foreign-placed capital, not through both of these methods. Tariffs and tax rates will dictate which will occur, i.e., tariffs and taxes will be shown to affect the pattern of trade, not merely the quantities of commodities traded.

The article discusses the Heckscher-Ohlin theorem, the Leontief paradox and patterns of economic growth. The core of the Heckscher-Ohlin theorem of the nature of trade patterns is the explanation of the relation between factor endowments and the doctrine of comparative costs. The theorem asserts that a country exports those commodities produced with relatively large amounts of the country's relatively abundant factor. Thus a capital rich country exports capital intensive products. Wassily Leontief applied the theorem to upset the popular notion that the U.S. exports capital intensive commodities. Leontief's input-output data show that America imports capital intensive commodities compared with American export goods. The output ratio of the capital intensive commodity would be higher in the capital abundant country than in the labor abundant country at a common factor price ratio. The relation of the closed economy commodity price ratios between the two countries depends upon demand conditions as well as factor endowment ratios and technological conditions.

The gain from trade and the gain from international investment were implicitly assumed to be mutually independent and separately calculable. In conformity with this assumption, the calculation of the optimal degree of trade restriction and of the optimal curb on investment were treated as unrelated problems. It is clear, however, that by changing the conditions of supply and the level of net income, both in the lending and in the borrowing country, international investment also may modify both the gain from trade and the optimal degree of trade restriction. The desired imports and exports of a country depend both on the terms of trade and on its net indebtedness. Suppose the latter is given. Then for each hypothetical value of the terms of trade one can plot desired imports and exports. The optimal rate of duty on any particular good will depend on the amount invested in the supplying country; and the optimal tax on earnings derived from a particular foreign country will depend on the amount of trade carried on with that country.

Discussion on gains from international trade has been a common interest for economists since a long time. Economist John Stuart Mill had restricted his consideration of trade to two countries and two commodities. Economist Alfred Marshall, in an elaboration to Mill's analysis, spoke of England's and Germany's goods as mutually exclusive categories of commodities conceptually gathered into representative bales. The classical contribution with respect to gains from international trade concerns the way in which gains are divided among countries when each country is considered as a unit. Both the classical theory and its neoclassical refinements neglect to explore how gains of real income from trade within each country are divided among various factors of production. In other words, the influence of international trade upon the distribution of national income has not receive much attention. The article presents a discussion on the impact of duty-free and duty imports and income distribution of a country, building on principles of the Heckscher-Ohlin model of comparative advantage.

In the March 1971 issue of the "The American Economic Review," economist James Melvin replied to author's comment on his 1968 treatment of the pattern of trade in a three-good, two-factor model. His reply, while conceding a basic error in his 1968 paper, takes issue with author's analysis at several points. Author rejects his arguments on these points and herein attempt to show where his reasoning has gotten off the track. In his 1968 paper Melvin makes the claim that whenever all goods are traded, the country exporting the labor intensive good will also be exporting the capital intensive good. In his comment author shows that equal relative factor-endowments is a necessary and sufficient condition for his claim to be true. At the same time author points out that "the example from which Melvin generalizes is often a possibility when endowment ratios differ." The version of the Heckscher-Ohlin theorem put forth in author's comment breaks the situation with production indeterminacy and unequal endowment ratios into two mutually exclusive cases: 1) each country must produce either the labor intensive or capital intensive good, 2) one country's endowment ratio is the same as the optimal factor intensity of the good of intermediate intensity and it produces only that good.

There has been some confusion between Douglas Stewart and the author about what he meant in his comment on author's paper in the journal "The American Economic Review." Author interpreted his statement that "equal relative factor-endowments is a necessary and sufficient condition for his claim to be true," to mean: Equal relative factor-endowments is a necessary and sufficient condition for the possibility of one country exporting both the labor and the capital intensive goods. This apparently is not what Stewart meant, and author apologizes for misinterpreting him. Author also seems to have interpreted Stewart as making a statement about trade when in fact he was concerned only with production. The article concludes with author's views on two points that he interpret as being at issue: 1) In a world of three goods and two factors it is possible, but by no means necessary, that one country will export both the capital intensive and the labor intensive goods. 2) In a two-good, two-factor case, and given the usual assumptions, the Heckscher-Ohlin theorem is very powerful in that it is able to predict the pattern of trade with a knowledge of relative endowments only. For the three-good case, two theorems have been suggested.

Presents an abstract of the research paper 'Efficiency, The Heckscher-Ohlin Theorem and Patterns of International Trade as Exemplified by Leontief Paradox,' published in the February 1964 issue of the periodical 'Economia Internazionale,' vol. 17.