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Do Factor Endowments Matter for North-North Trade?

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  • Donald R. Davis
  • David E. Weinstein

Abstract

The dominant paradigm of world trade patterns posits two principal features. Trade between North and South arises due to traditional comparative advantage, largely determined by differences in endowment patterns. Trade within the North, much of it intra-industry trade, is based on economies of scale and product differentiation. The paradigm specifically denies an important role for endowment differences in determining North-North trade. This paper provides the first sound empirical examination of this question. We demonstrate that trade in factor services among countries of the North is systematically related to endowment differences and large in economic magnitude. Intra-industry trade, rather than being a puzzle for a factor endowments theory, is instead the conduit for a great deal of this factor service trade.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8516.

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Date of creation: Oct 2001
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Publication status: published as Marjit, Sugata and Eden Yu (eds.) Contemporary and Emerging Issues in Trade Theory and Policy. Elsevier, 2008.
Handle: RePEc:nbr:nberwo:8516

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  1. Bowen, Harry P & Leamer, Edward E & Sveikauskas, Leo, 1987. "Multicountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 791-809, December.
  2. Edward E. Leamer & James Levinsohn, 1994. "International Trade Theory: The Evidence," NBER Working Papers 4940, National Bureau of Economic Research, Inc.
  3. Elhanan Helpman, 1998. "The Structure of Foreign Trade," Harvard Institute of Economic Research Working Papers 1848, Harvard - Institute of Economic Research.
  4. Bernstein, Jeffrey R. & Weinstein, David E., 2002. "Do endowments predict the location of production?: Evidence from national and international data," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 55-76, January.
  5. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," NBER Working Papers 6785, National Bureau of Economic Research, Inc.
  6. Maskus, Keith E., 1985. "A test of the Heckscher-Ohlin-Vanek theorem: The Leontief commonplace," Journal of International Economics, Elsevier, Elsevier, vol. 19(3-4), pages 201-212, November.
  7. James Harrigan, 1996. "Technology, factor supplies, and international specialization: estimating the neoclassical model," Staff Reports, Federal Reserve Bank of New York 15, Federal Reserve Bank of New York.
  8. Repetto, A. & Ventura, J., 1997. "The Leontief-Trefler Hypothesis and Factor Price Insensitivity," Working papers 97-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(6), pages 961-87, December.
  10. Helpman, Elhanan, 1981. "International trade in the presence of product differentiation, economies of scale and monopolistic competition : A Chamberlin-Heckscher-Ohlin approach," Journal of International Economics, Elsevier, Elsevier, vol. 11(3), pages 305-340, August.
  11. Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc.
  12. Lancaster, Kelvin, 1980. "Intra-industry trade under perfect monopolistic competition," Journal of International Economics, Elsevier, Elsevier, vol. 10(2), pages 151-175, May.
  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, American Economic Association, vol. 87(3), pages 421-46, June.
  14. Dalia Hakura, 1999. "A Test of the General Validity of the Heckscher-Ohlin Theorem for Trade in the European Community," IMF Working Papers 99/70, International Monetary Fund.
  15. Harrigan, James, 1994. "Scale Economies and the Volume of Trade," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 321-28, May.
  16. Trefler, Daniel & Zhu, Susan Chun, 2010. "The structure of factor content predictions," Journal of International Economics, Elsevier, Elsevier, vol. 82(2), pages 195-207, November.
  17. Wood, Adrian, 1995. "North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198290155, October.
  18. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1029-46, December.
  19. Brecher, Richard A. & Choudhri, Ehsan U., 1982. "The factor content of international trade without factor-price equalization," Journal of International Economics, Elsevier, Elsevier, vol. 12(3-4), pages 277-283, May.
  20. Helpman, Elhanan, 1984. "The Factor Content of Foreign Trade," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(373), pages 84-94, March.
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Citations

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Cited by:
  1. Dudley, Leonard & Moenius, Johannes, 2007. "The great realignment: How factor-biased innovation reshaped comparative advantage in the U.S. and Japan, 1970-1992," Japan and the World Economy, Elsevier, Elsevier, vol. 19(1), pages 112-132, January.
  2. Alejandro Cuñat & Marco Maffezzoli, 2007. "Can Comparative Advantage Explain the Growth of us Trade?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(520), pages 583-602, 04.
  3. Donald R. Davis & David E. Weinstein, 2001. "The Factor Content of Trade," NBER Working Papers 8637, National Bureau of Economic Research, Inc.
  4. Widell, Lars, 2005. "On Measurements of the Factor Content of Trade: - The Case of Sweden," Working Papers, Örebro University, School of Business 2005:7, Örebro University, School of Business.
  5. Keyu Jin, 2009. "Industrial structure and financial capital flows," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 25827, London School of Economics and Political Science, LSE Library.
  6. Strauss-Kahn, Vanessa, 2003. "Globalization and wage premia: reconciling facts and theory," MPRA Paper 20410, University Library of Munich, Germany.
  7. Reimer, Jeffrey J., 2006. "Global production sharing and trade in the services of factors," Journal of International Economics, Elsevier, Elsevier, vol. 68(2), pages 384-408, March.
  8. DUDLEY, Leonard & MOENIUS, Johannes, 2003. "Directed Technical Change and International Trade," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-18, Universite de Montreal, Departement de sciences economiques.

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