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How do endowments determine trade? quantifying the output mix, factor price, and skill-biased technology channels

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  • Morrow, Peter M.
  • Trefler, Daniel

Abstract

Differences in how countries absorb endowments of skilled and unskilled labour can be decomposed into (a) differences in the skewness of output mix towards skill-intensive industries and (b) differences in the skill intensity of each industry. The latter can be decomposed into contributions from cross-country differences in (2a) relative wages and (2b) skill-biased factor-augmenting technologies. To investigate the relative importance of each, we develop a multi-sector Eaton-Kortum model featuring skilled/unskilled labour and factor-augmenting international technology differences. The model is calibrated to WIOD data for 39 countries in 2006. Using a model-based decomposition, we show that the skill-intensity mechanism is much more important than output-mix. Further, differences in skill intensities across countries are explained in similar proportions by the relative-wage mechanism and the technology mechanism. Our results have immediate implications for the impact of endowments and skill-biased technology on output mix, trade in goods, and international differences in skill premia.

Suggested Citation

  • Morrow, Peter M. & Trefler, Daniel, 2022. "How do endowments determine trade? quantifying the output mix, factor price, and skill-biased technology channels," Journal of International Economics, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:inecon:v:137:y:2022:i:c:s0022199622000526
    DOI: 10.1016/j.jinteco.2022.103620
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