Empirical Tests of Comparative Advantage: Factor Proportions, Technology, and Geography

This paper derives a consolidated regression equation to estimate the sources of comparative advantage; integrating the Heckscher-Ohlin model, the Ricardian model, and the gravity model. It also aims to test which of the three competing models better explains the bilateral trade flows. For the empirical estimation, it sets up a consistent dataset for 65-countries and 42-industries in 1997, 2001, and 2004. The estimation results generally confirm the three competing models, but relative strength of the Heckscher-Ohlin model turns out to be the most potent, followed by the gravity model, and the Ricardian model. The results reveal that the signs of the estimates such as production factors and total factor productivity are positive in all significant results. In addition, the gravity variables including the distance variable and dummies such as borders, languages, colony, and FTA explain the changes in trade share very well. The explanatory power of the three competing models turned out to be different depending on sectoral and regional groups. A sign for the capital turned out to be negative in case of regressions for the natural resource intensive sector, but they are not statistically significant. In case of the Ricardian model, this paper does not indicate that technological difference is statistically significant for the sectoral groups. It is interesting to see that the sign of the colony dummy for developed countries, other European countries, and Central America turned out to be different from the prediction.