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Per Capita Income and the Mystery of Missing Trade

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  • James Cassing
  • Shuichiro Nishioka

Abstract

The literature on the Heckscher–Ohlin–Vanek (HOV) model has concentrated on the production side, particularly the unrealistic assumptions of identical techniques and factor price equalization. However, less is known about the demand side. In this paper, we compare the supply side assumptions versus the demand side assumptions as a cause of the empirical failures in the HOV prediction. While the relaxation in the supply side assumptions is crucial to predict the direction of factor trade, the demand side assumptions are shown to play an important role in explaining why factor trade is “missing” in relation to the HOV prediction. For example of the slope test for labor, the supply side repair improves from 0.026 to 0.162, whereas the demand side repair improves significantly from 0.162 to 0.891.

Suggested Citation

  • James Cassing & Shuichiro Nishioka, 2015. "Per Capita Income and the Mystery of Missing Trade," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 606-619, August.
  • Handle: RePEc:bla:reviec:v:23:y:2015:i:3:p:606-619
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    File URL: http://hdl.handle.net/10.1111/roie.12180
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    References listed on IDEAS

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    Cited by:

    1. Robert Stehrer, 2014. "Does the Home Bias Explain Missing Trade in Factors?," wiiw Working Papers 110, The Vienna Institute for International Economic Studies, wiiw.

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