Cones of diversification in a model of international comparative advantage
The hypothesis that all countries belong to a single cone of diversification is often used in studies of international trade. However, contrary to this hypothesis, the range of capital-labour input ratios in US industries does not encompass the range of capital- labour endowment ratios in the world's economies. Furthermore, among countries with capital-labour endowment ratios below the range of US capital-labour input ratios, wage rates are much lower than in the US. In this paper, the one-cone hypothesis is assessed relative to a two-cone alternative by clustering countries with similar factor proportions, estimating regressions for gross national product and net exports, testing for equality of coefficients, and approximating the posterior odds on one- and two-cone models. Rejecting the one-cone hypothesis, the paper presents estimates of a two-cone model and considers their implications for factor flows and the prospects of emerging market economies.
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Volume (Year): 9 (2001)
Issue (Month): 2 ()
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