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Factor Proportions and the Growth of World Trade

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    Abstract

    Most of the expansion of global trade during the last three decades has been of the North-South kind – between capital-abundant developed and labour-abundant developing countries. Based on this observation, I argue that the recent growth of world trade is best understood from a factor-proportions perspective. I present novel evidence documenting that differences in capital-labour ratios across countries have increased in the wake of two shocks to the global economy: i) the opening up of China and ii) financial globalisation and the resulting upstream capital flows towards capital-abundant regions. I analyse their impact on specialisation and the volume of trade in a dynamic model which combines factor-proportions trade in goods with international trade in financial assets. Calibrating this model, I find that it can account for 60% of world trade growth between 1980 and 2007. It is also capable of predicting international investment patterns which are consistent with the data.

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    Bibliographic Info

    Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 226.

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    Length: 47
    Date of creation: 18 Sep 2013
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    Handle: RePEc:edn:esedps:226

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    Keywords: Heckscher-Ohlin; international trade; China; financial globalisation;

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    1. Elhanan Helpman, 1998. "The Structure of Foreign Trade," Harvard Institute of Economic Research Working Papers 1848, Harvard - Institute of Economic Research.
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