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A proportionality assumption and measurement biases in the factor content of trade

  • Puzzello, Laura

This paper revisits Trefler and Zhu's (2005, 2010) (TZ) empirical examination of the factor content of trade in the presence of international differences in production techniques and trade in inputs. In this framework, knowing the bilateral details of each country's input–output structure is key to the correct calculation of the factor content of trade. Because input–output tables typically lack this detail, TZ impute the relevant input–output coefficients by making a proportionality assumption. This paper uses survey-based input–output coefficients from the Asian Input–output (AIO) tables that do provide bilateral details. Exploiting methodological differences in the compilation of the AIO tables and the data underlying TZ studies, this paper empirically assesses how well the TZ approach fits sourcing patterns of inputs and finds that it understates countries' use and relative use of foreign inputs, especially in those sectors where they are most used. As a result countries' use of domestic factors is overstated. Biases generated on exported and imported factor services cancel each other out. The net effect on the measured factor trade is small.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 87 (2012)
Issue (Month): 1 ()
Pages: 105-111

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Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:105-111
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  1. repec:oup:qjecon:v:114:y:1999:i:3:p:907-940 is not listed on IDEAS
  2. Reimer, Jeffrey J., 2006. "Global production sharing and trade in the services of factors," Journal of International Economics, Elsevier, vol. 68(2), pages 384-408, March.
  3. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  4. Keith E. Maskus & Shuichiro Nishioka, 2008. "Development-Related Biases in Factor Productivities and the HOV Model of Trade," CESifo Working Paper Series 2253, CESifo Group Munich.
  5. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, vol. 92(1), pages 93-119, March.
  6. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  7. Donald R. Davis & David E. Weinstein, 2001. "An Account of Global Factor Trade," American Economic Review, American Economic Association, vol. 91(5), pages 1423-1453, December.
  8. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
  9. Trefler, Daniel & Zhu, Susan Chun, 2010. "The structure of factor content predictions," Journal of International Economics, Elsevier, vol. 82(2), pages 195-207, November.
  10. Deborah Winkler, William Milberg, 2009. "WP 2009-12 Errors from the “Proportionality Assumption” in the Measurement of Offshoring: Application to German Labor Demand," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2009-12, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
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