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What's the Use of Factor Contents?

  • Edward E. Leamer

The net imports of labor embodied in international trade has been a fairly small and stable share of the US labor force. From this some conclude that trade has not been a major contributor to the income inequality trends. This is a non sequitur. The labor embodied in trade is jointly determined by tastes, technologies, factor supplies and the external goods market. Although it is impossible to use factor contents to disentangle trade from technology, the factor contents can be used to suggest the change of earnings shares if the country were to close down external trade entirely. However, this is a proper application of factor contents only if tastes and technologies are log-linear, if trade is balanced and if foreign input intensities are used to compute factor contents of non-competing imports. Factor contents are virtually useless if technologies and tastes are not log-linear, or if the external deficit is substantial and variable. Factor contents do not tell us anything about earnings levels as opposed to shares. They also do not inform us of the impact of partial trade barriers that change relative product prices but do not completely eliminate trade. In other words, the title question is rhetorical.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5448.

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Date of creation: Feb 1996
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Publication status: published as Journal of International Economics, Vol.50, no.1 (February 2000): 17-50.
Handle: RePEc:nbr:nberwo:5448
Note: ITI
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  1. Hakura, D. & Deardorff, A.V., 1993. "Trade and Wages: What Are the Questions?," Working Papers 341, Research Seminar in International Economics, University of Michigan.
  2. Robert E. Baldwin, 1995. "The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages," OECD Jobs Study Working Papers 4, OECD Publishing.
  3. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 1-84.
  4. Paul Krugman, 1995. "Technology, Trade, and Factor Prices," NBER Working Papers 5355, National Bureau of Economic Research, Inc.
  5. Deardorff, Alan V. & Staiger, Robert W., 1988. "An interpretation of the factor content of trade," Journal of International Economics, Elsevier, vol. 24(1-2), pages 93-107, February.
  6. Wood, Adrian, 1995. "North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World," OUP Catalogue, Oxford University Press, number 9780198290155.
  7. 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.
  8. Paul Krugman & Robert Lawrence, 1993. "Trade, Jobs, and Wages," NBER Working Papers 4478, National Bureau of Economic Research, Inc.
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