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Factor supplies and specialization in the world economy

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  • James Harrigan
  • Egon Zakrajsek

Abstract

A core prediction of the Heckscher-Ohlin theory is that countries specialize in goods in which they have a comparative advantage, and that the source of comparative advantage is differences in relative factor supplies. To examine this theory, we use the most extensive dataset available and document the pattern of industrial specialization and factor endowment differences in a broad sample of rich and developing countries over a lengthy period (1970-92). Next, we develop an empirical model of specialization based on factor endowments, allowing for unmeasurable technological differences and estimate it using panel data techniques. In addition to estimating the effects of factor endowments, we also consider an alternative hypothesis that the level of aggregate productivity by itself can explain specialization. Our results clearly show the importance of factor endowments on specialization: relative endowments do matter.

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File URL: http://www.federalreserve.gov/pubs/feds/2000/200043/200043abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/2000/200043/200043pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-43.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-43

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Keywords: International trade ; International economic relations;

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  1. Baltagi, Badi H. & Li, Qi, 1991. "A transformation that will circumvent the problem of autocorrelation in an error-component model," Journal of Econometrics, Elsevier, vol. 48(3), pages 385-393, June.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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