hero working papers

Can International Trade Equalize Factor Prices?

Number: 180
Year: 2000
Author(s): Alejandro Cuat (IGIER)

This paper studies whether the Heckscher-Ohlin models condition for factor price equalization holds. For this purpose information on national factor endowments and sectoral income shares is used to construct a theory based quantitative criterion. In the context of two production factors, capital and labor, it is shown that the whole world cannnot be a unique diversification cone, since the factor endowments of countries vary too much relative to the factor intensities of industries. The factor endowments of OECD countries instead are such that they can be under factor price equalization. These results cast doubts on the validity of the FPE model in a favor of the complete specialization model both concenrning empirical research on the net factor content of trade, and as an analyticial workhorse to study many aspects of international trade, economic growth, etc. for large cross-sections of countries.