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The factor content of regional bilateral trade: the role of technology and demand

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  • Andrés Artal-Tur

    (Technical University of Cartagena, Spain)

  • Juana Castillo-Giménez

    (University of Valencia, Spain)

  • Carlos Llano-Verduras

    (Autónoma University of Madrid and CEPREDE, Lawrence R. Klein Institute, Spain)

  • Francisco Requena-Silvente

    (University of Valencia, Spain)

Abstract

The Heckscher-Ohlin-Vanek (HOV) model in its strict form has been strongly rejected by the data. Relaxing some assumptions of the standard HOV model is key to find improvements in its performance. We apply Davis and Weinstein (2001) methodology to analyse the validity of the HOV model using regions rather than countries. Surprisingly, our results using data for 17 Spanish regions are similar to theirs with international data for OECD countries. Accounting for technological differences improve the predictive capacity of the factor proportions model and including trade costs and geography reduce significantly the missing trade problem. However, relaxing the assumption of factor price equalisation does not improve the performance of the HOV model in a regional setting.

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File URL: ftp://147.156.210.157/RePEc/pdf/eec_1007.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Department of Applied Economics II, Universidad de Valencia in its series Working Papers with number 1007.

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Length: 39 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:eec:wpaper:1007

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Keywords: Heckscher-Ohlin-Vanek (HOV) model; technological differences; gravity equation; Spanish regions;

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References

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  1. James Harrigan, 1998. "Estimation of cross-country differences in industry production functions," Staff Reports 36, Federal Reserve Bank of New York.
  2. Hakura, Dalia S., 2001. "Why does HOV fail?: The role of technological differences within the EC," Journal of International Economics, Elsevier, vol. 54(2), pages 361-382, August.
  3. Francisco Requena & Carlos Llano, 2010. "The border effects in Spain: an industry-level analysis," Empirica, Springer, vol. 37(4), pages 455-476, November.
  4. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December.
  5. Daniel Trefler & Susan Chun Zhu, 2005. "The Structure of Factor Content Predictions," NBER Working Papers 11221, National Bureau of Economic Research, Inc.
  6. Keith E. Maskus & Shuichiro Nishioka, 2009. "Development-related biases in factor productivities and the HOV model of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 519-553, May.
  7. Xu, Yingfeng, 1993. "A General Model of Comparative Advantage with Two Factors and a Continuum of Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 365-80, May.
  8. Elhanan Helpman, 1998. "The Structure of Foreign Trade," Harvard Institute of Economic Research Working Papers 1848, Harvard - Institute of Economic Research.
  9. James Harrigan, 1996. "Technology, Factor Supplies and International Specialization: Estimating the Neoclassical Model," NBER Working Papers 5722, National Bureau of Economic Research, Inc.
  10. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," Harvard Institute of Economic Research Working Papers 1849, Harvard - Institute of Economic Research.
  11. Yong-Seok Choi & Pravin Krishna, 2004. "The Factor Content of Bilateral Trade: An Empirical Test," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 887-914, August.
  12. Bowen, Harry P & Leamer, Edward E & Sveikauskas, Leo, 1987. "Multicountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review, American Economic Association, vol. 77(5), pages 791-809, December.
  13. Davis, Donald R. & David E. Weinstein & Scott C. Bradford & Kazushige Shimpo, 1997. "Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works," American Economic Review, American Economic Association, vol. 87(3), pages 421-46, June.
  14. Maskus, Keith E., 1985. "A test of the Heckscher-Ohlin-Vanek theorem: The Leontief commonplace," Journal of International Economics, Elsevier, vol. 19(3-4), pages 201-212, November.
  15. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
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