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The factor content of regional bilateral trade: the role of technology and demand

Author

Listed:
  • Andrés Artal-Tur

    (Technical University of Cartagena, Spain)

  • Juana Castillo-Giménez

    (University of Valencia, Spain)

  • Carlos Llano-Verduras

    (Autónoma University of Madrid and CEPREDE, Lawrence R. Klein Institute, Spain)

  • Francisco Requena-Silvente

    (University of Valencia, Spain)

Abstract

The Heckscher-Ohlin-Vanek (HOV) model in its strict form has been strongly rejected by the data. Relaxing some assumptions of the standard HOV model is key to find improvements in its performance. We apply Davis and Weinstein (2001) methodology to analyse the validity of the HOV model using regions rather than countries. Surprisingly, our results using data for 17 Spanish regions are similar to theirs with international data for OECD countries. Accounting for technological differences improve the predictive capacity of the factor proportions model and including trade costs and geography reduce significantly the missing trade problem. However, relaxing the assumption of factor price equalisation does not improve the performance of the HOV model in a regional setting.

Suggested Citation

  • Andrés Artal-Tur & Juana Castillo-Giménez & Carlos Llano-Verduras & Francisco Requena-Silvente, 2010. "The factor content of regional bilateral trade: the role of technology and demand," Working Papers 1007, Department of Applied Economics II, Universidad de Valencia.
  • Handle: RePEc:eec:wpaper:1007
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    References listed on IDEAS

    as
    1. Keith E. Maskus & Shuichiro Nishioka, 2009. "Development-related biases in factor productivities and the HOV model of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 519-553, May.
    2. Hakura, Dalia S., 2001. "Why does HOV fail?: The role of technological differences within the EC," Journal of International Economics, Elsevier, vol. 54(2), pages 361-382, August.
    3. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-987, December.
    4. Bowen, Harry P & Leamer, Edward E & Sveikauskas, Leo, 1987. "Multicountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review, American Economic Association, vol. 77(5), pages 791-809, December.
    5. Xu, Yingfeng, 1993. "A General Model of Comparative Advantage with Two Factors and a Continuum of Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 365-380, May.
    6. Yong-Seok Choi & Pravin Krishna, 2004. "The Factor Content of Bilateral Trade: An Empirical Test," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 887-914, August.
    7. Elhanan Helpman, 1999. "The Structure of Foreign Trade," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 121-144, Spring.
    8. Trefler, Daniel & Zhu, Susan Chun, 2010. "The structure of factor content predictions," Journal of International Economics, Elsevier, vol. 82(2), pages 195-207, November.
    9. Davis, Donald R. & David E. Weinstein & Scott C. Bradford & Kazushige Shimpo, 1997. "Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works," American Economic Review, American Economic Association, vol. 87(3), pages 421-446, June.
    10. Francisco Requena & Carlos Llano, 2010. "The border effects in Spain: an industry-level analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(4), pages 455-476, November.
    11. Harrigan, James, 1999. "Estimation of cross-country differences in industry production functions," Journal of International Economics, Elsevier, vol. 47(2), pages 267-293, April.
    12. Rudiger Dornbusch & Stanley Fischer & Paul A. Samuelson, 1980. "Heckscher-Ohlin Trade Theory with a Continuum of Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 95(2), pages 203-224.
    13. 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.
    14. Harrigan, James, 1997. "Technology, Factor Supplies, and International Specialization: Estimating the Neoclassical Model," American Economic Review, American Economic Association, vol. 87(4), pages 475-494, September.
    15. Maskus, Keith E., 1985. "A test of the Heckscher-Ohlin-Vanek theorem: The Leontief commonplace," Journal of International Economics, Elsevier, vol. 19(3-4), pages 201-212, November.
    16. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-1046, December.
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    Cited by:

    1. Juan de Lucio & Raúl Mínguez & Asier Minondo & Francisco Requena, 2017. "The granular and fundamental components of export specialization," Working Papers 1704, Department of Applied Economics II, Universidad de Valencia.
    2. Narayan, Seema & Nguyen, Tri Tung, 2016. "Does the trade gravity model depend on trading partners? Some evidence from Vietnam and her 54 trading partners," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 220-237.

    More about this item

    Keywords

    Heckscher-Ohlin-Vanek (HOV) model; technological differences; gravity equation; Spanish regions;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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