Development Accounting in a Heckscher-Ohlin World

What are the reasons for cross country differences in income per worker? Are they caused by differential factor endowments or by cross country variation in productivity? If productivity matters, what form do productivity differences have? In this paper I address these questions from an open economy perspective using tools from development accounting. I show that trade changes the relationship between factors, productivities and income in a crucial way. In addition, I simultaneously fit income and trade data, which enables me to evaluate the quality of my productivity calibrations. The model best supported by trade data has factor specific productivities and complementarities between human and physical capital. Rich countries use physical capital more efficiently than poor countries, while medium income countries employ human capital in the most productive way.