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Do Endowments Predict the Location of Production? Evidence from National and International Data

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  • Jeffrey R. Bernstein
  • David E. Weinstein

Abstract

Examining the relationship between factor endowments and production patterns using international and Japanese regional data, we provide the first empirical confirmation of Ethier's correlation approach to the Rybczynski theorem. Moreover, we find evidence of substantial production indeterminacy. Prediction errors are six to thirty times larger for goods traded relatively freely. A compelling explanation of this phenomenon is the existence of more goods than factors in the presence of trade costs. This result implies that regressions of trade or output on endowments have weak theoretical foundations. Furthermore, since errors are largest in data sets where trade costs are small, we explain why the common methodology of imputing trade barriers from regression residuals often leads to backwards results.

Suggested Citation

  • Jeffrey R. Bernstein & David E. Weinstein, 1998. "Do Endowments Predict the Location of Production? Evidence from National and International Data," NBER Working Papers 6815, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6815
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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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