Factor Efficiency, Substitution, And The Basis For Trade: Some Empirical Evidence

This study provides evidence on the causes of per capita output differences between the United States on the one hand and Britain and Germany on the other. By assuming first‐degree homogeneous production functions and using capital data, we find that more than half of such differences were due to capital endowment and the remainder to resource effectiveness in the U. S. ‐German comparison. In the U. S. ‐British case resource effectiveness was the main cause. Of at least equal interest was the difference from one industry to another in productivity ratios. This fact casts some doubt on the factor‐endowment explanation for international trade, at least so far as manufactures arc concerned. Level of technology, organization, and scale may be causes at least as important for trade in industrial products. Elasticities of substitution between labor and capital were calculated and they were found to be quite small. These were used to check whether actual factor‐rental ratios were safely within a range where intensity reversals would not take place for substantial further rental changes. This proved indeed to be the case. A tentative conclusion is therefore that the Heckscher‐Ohlin explanation of trade is not called into question so much by shifting of relative factor‐intensities as by large domestic inter‐industry differences of efficiency.