Table Of ContentStudies in Empirical Economics
Aman Ullah (Ed.)
Semi parametric and
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1989. ISBN 3-7908-0418-5
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Mirela Keuschnigg
Comparative Advantage
in International Trade
Theory and Evidence
With 21 Tables
Physica-Verlag
A Springer-Verlag Company
Editorial Board
Winfried Pohlmeier, University of Konstanz, Germany
Baldev Raj, Wilfrid Laurier University, Waterloo, Canada
Andreas Worgotter, Institute for Advanced Studies, Vienna, Austria
Author
Mirela Keuschnigg
Steinhiibel 39
D-66123 Saarbriicken
Germany
ISBN 978-3-642-50214-9 ISBN 978-3-642-50212-5 (eBook)
DOl 10.1007/978-3-642-50212-5
CataJoging-in-Publication Data applied for
Die Deutsche Bibliothek - CIP-Einheitsaufnahme
Comparative advantage in international trade: with 21 tableslMirela Keuschnigg. - Heidel
berg; New York: Physica-Verl., 1999
(Studies in empirical economics)
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Acknowledgments
I wrote this thesis at the European University Institute in Florence and the
Institute for Advanced Studies in Vienna. Now the time has come to thank
a number of persons for the help they have given to me, either directly or
indirectly in completing the thesis.
Special thanks go to Stephen Martin, my thesis supervisor, for reading several
versions of the manuscript, for valuable suggestions and helpful discussions.
His door was always open to me. He also helped obtaining many data used in
the empirical work. Others helped as well. Louis Phlips, John Micklewright,
and Andreas Worgotter commented on various portions of the manuscript in
various stages of its development. I was able to discuss a number of issues
with Grayham Mizon, Josef Zweimiiller and Robert Kunst. Edward Leamer
was the first to read parts of the manuscript, encouraged me to continue
with it, and made many helpful suggestions. So did Wilhelm Kohler. I am
especially grateful for his extensive and helpful comments on drafts of some of
the chapters. Harald Sonnberger gave valuable computer assistance. Michael
Begg and Albert Hart corrected very carefully the English. I am also grateful
to the Economics Department secretaries. Jessica and Jacqueline provided
irreplaceable help and moral support.
I would like to mention the people with whom I shared these years. My
best friends, whose confidence in my work helped or kept me from giving up.
Cathy, Isabela, Merce, Jarko, Helmut, Bernhard, thank you all. Also, I wish
to thank my parents and all other relatives and friends, who have in some
way or another assisted and encouraged me during these years.
Finally, the ideas of this work have originated and been enriched by many
conversations with my greatest friend, Christian. His advice was really stim
Ulating. He deserves special thanks for offering more than one could ask in
intellectual and emotional support.
Contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
I Theory 5
1 Introduction 7
2 The Basic HOV Theory 13
2.1 The Quantity Version 13
2.2 The Value Version .. 18
3 Generalizations of HOV Theory 21
3.1 Non-Neutral Technological Differences 21
3.2 Internal Increasing Returns 23
3.3 External Increasing Returns . 28
3.4 Internationally Mobile Capital 30
3.5 Armington Preferences . . . . . 32
4 Theory-Based EmpirIcal Implementation 35
4.1 Direct Tests . 35
4.2 Indirect Tests 36
4.2.1 Ranking Propositions 36
4.2.2 Simple Correlations 42
4.2.3 Multiple Correlations 44
Appendix ........... 50
5 Conclusions 53
viii CONTENTS
II Evidence 55
6 Introduction 57
7 Literature Overview 61
7.1 Factor Content Studies . 62
7.2 Overview of Cross-Industry Studies . 67
7.2.1 Problems in the Cross-Industry Empirical Studies 68
7.2.2 Cross-Industry Studies ... 71
7.3 Overview of Cross-Country Studies 77
8 Empirical Analysis 81
8.1 Introduction ... 81
8.2 Description of the Data and Variables 86
8.2.1 Data ... 86
8.2.2 Variables 93
8.3 Empirical Results . 96
8.3.1 Simple Correlations 97
8.3.2 Ranking Proposition 1 114
8.3.3 Technology Parameters: How Similar is 8? 118
8.3.4 Similarities in the Trade Patterns . 119
8.3.5 Multiple Correlations 120
9 Conclusions 139
Appendix A . 143
Appendix B . 145
List of Symbols 149
List of Abbreviations . 153
Bibliography 155
Index .... 163
Introduction
Traditional trade theory explains trade only by differences between countries,
notably differences in their relative endowments of factors of production. It
suggests an inverse relationship between the similarity of countries and the
volume of trade between them. The Heckscher-Ohlin (HO) factor propor
tions theory derives the determinants of comparative advantage in a world
of "two-ness" (two goods, two factors, two countries). It predicts that each
country will export that good which uses the country's abundant factor rel
atively most intensively. The literature on trade offers an impressive number
of studies based on the HO theory. The main methodological problems en
countered in the literature are: first, the appropriate formulation of the HO
theorem in a multi-factor, multi-good and multi-country framework; second,
proper tests of the HO theory and proper links of the theory to empirical
analysis.
The relevance of the HO theory began to be questioned when important facts
of modern international trade proved to be inconsistent with its theoretical
framework. Leontief (1953) tested the factor proportions theory, using the
US data for 1947, and found that the US had more labor-intensive exports
than imports, which is opposed to both perceptions and estimations of factor
endowments. The Leontief Pamdoxcreated doubt as to whether or not actual
trade patterns and factor endowments are related as predicted by theory, and
caused many controversial discussions with regard to the proper empirical
implementation of the factor proportions theory. Leamer (1980) showed that
Leontief's comparison does not reveal the relative abundance of capital and
labor in a multi-factor world and that, therefore, no paradox arises if the
computations are conceptually correct. Vanek (1968) was the first to offer a
restatement of the HO theorem in the multi-factor, multi-good case.
Very little empirical support is available for an exact linear relationship be
tween trade flows and factor supplies as predicted by the HO theory. However,
the consensus seems to be that factor endowments exert a positive and linear
influence on the factor content of trade flows, but that they hardly constitute
the only important explanation of commodity trade patterns. Recent debates
cast suspicion over the usefulness of the regression interpretation of the HO
theory.
2 INTRODUCTION
The relevance of the HO theory is also questioned by the growing trade
between developed countries with similar factor endowments. Actual trade
patterns seem to include considerable two-way trade in goods of similar factor
intensity, which is difficult to explain from the point of view of a traditional
analysis. Essential contributions by Krugman (1979), Dixit and Norman
(1980), Ethier (1979, 1982), as well as Helpman and Krugman (1985) of
fer theoretical models that refine the HO model by allowing for economies
of scale, product differentiation, and departures from perfect competition.
The outcome is a more generalized HO theorem that preserves the factor
endowment basis for inter-industry trade, while extending the theory to allow
for and explain intra-industry trade.
This study is inspired from previous work by Vanek and Leamer. It addresses
the empirical validity of the factor proportions theory on a new methodolog
ical as well as a new data basis. A first part presents theoretical models
based on the HO theory for explaining a country pattern of net trade. By
way of contrast to other studies, the models are derived in a multi-country,
multi-factor and multi-good framework, and they allow factor productivities
and factor prices to differ across countries.
The presence of scale economies and product differentiation makes the as
sumptions of the models slightly more realistic, while the standard model
is more general. Such generalization is required for a meaningful empirical
investigation of these models. Finally, a model with international capital
mobility is developed. The choice of these specific extensions, from the many
that could be tried, is determined by the fact that, in the existing empirical
work, foreign direct investment, economies of scale, or product differentiation
appear on the list of the regressors without any reference to a theoretical
model. Moreover, we hope that allowing for these extensions will help us to
better understand the shortcomings of the concept of comparative advantage.
Given these theoretical models, we turn to the issue of theory-based empir
ical estimation equations in the context of the factor proportions approach
to comparative advantage. A set of cross-industry regression equations is
proposed to be used for explaining the countries' patterns of comparative
advantage. A whole series of rank order propositions derived from the HOV
(Heckscher-Ohlin-Vanek) equations are reformulated. A significant feature
of this part is the emphasis on the difference between considering value and
quantity formulations. This is in contrast with the previous literature, which
is usually less careful in this respect as it repeatedly assumes factor price
equalization. Since we allow for internationally non-equalized factor prices,
the difference between quantity and value formulations of various proposi
tions becomes very important.
Based on the models developed in the theory part, a second part reports the
results of an empirical study of the patterns of international trade for a big
sample of developed and developing countries in a cross-industry framework.
Introduction 3
The results of this empirical study show some support for the value version
of the HOV model, especially in the case of developing countries. First,
simple and multiple correlations between net exports and factor intensities
indicate that, as expected, developing countries have their trade negatively
(positively) correlated with high-skilled (low-skilled) labor, while the pattern
observed for the developed countries is the opposite. A second important
result is that, when defining factor intensities as factor cost shares, there is
no factor intensity reversal across countries. In contrast, previous studies
have reported the existence of factor intensity reversal when defining factor
intensities by unit factor requirements. Third, we find that the results are
sensitive to the way we define and compute some of the variables. Fourth,
using a ranking proposition we realize that the developing countries are re
vealed both by their trade and by their factor endowments to be relatively
better endowed with low-skilled than with high-skilled labor, while the op
posite is true for the developed countries. All the countries for which this
proposition holds turn out to be better endowed with labor, either high- or
low-skilled, than with capital. Fifth, we find that we cannot reject the HOV
model, developed in a perfect competition framework, in favor of a model al
lowing for economies of scale and product differentiation. More detailed data
on production and input factors by industry and country are necessary to
make more precise statements about the role of scale economies and product
differentiation.
Description:Traditional trade theory explains trade only by differences between countries, notably differences in their relative endowments of factors of production. It suggests an inverse relationship between the similarity of countries and the volume of trade between them. The Heckscher-Ohlin (HO) factor prop
