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Replacing the Autarky Factor Prices with the Corresponding Post-Trade Prices: An Extension of Deardorff's Factor-Proportions Theory of Trade

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  • Mehrdad Madresehee

Abstract

A generalized version of the Heckscher-Ohlin model of trade (factor-proportions theory of the pattern of trade) has been developed by A. V. Deardorff for the ℓ-factor, m-commodity, and n-country case. Even though Deardorffs model does not add to the unrealistic assumptions of the simple version of the model, it seems to have a basic problem—it is untestable. One of the reasons that Deardorffs model is not testable is due to the fact that the model measures the relative abundance of factors in a country by comparing their relative autarky prices in that country with those of the same factor in other trading countries. Since the autarky factor prices are not observable, this model cannot be tested unless further assumptions are made about the relationship between pre-trade and post-trade factor prices. To overcome the problem concerning the unobservability of autarky factor prices, I have proved two theorems which make it possible to conduct tests to support the Deardorff model by allowing for the replacement of the autarky factor prices with the corresponding post-trade prices whenever the former ones should be used in the test. According to the corollaries which follow from these two theorems, any positive test result which is conducted based on post-trade factor prices can be used as supportive evidence to validate Deardorffs model which was formulated based on pre-trade factor price. However, unsatisfactory results cannot be used to falsify Deardorffs model due to the fact that the proved conditions are sufficient but not necessary.

Suggested Citation

  • Mehrdad Madresehee, 1993. "Replacing the Autarky Factor Prices with the Corresponding Post-Trade Prices: An Extension of Deardorff's Factor-Proportions Theory of Trade," The American Economist, Sage Publications, vol. 37(2), pages 53-58, October.
    • Handle: RePEc:sae:amerec:v:37:y:1993:i:2:p:53-58
    DOI: 10.1177/056943459303700209
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    References listed on IDEAS

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