Do Countries' Factor Endowments Correspond to the Factor Contents in Their Bilateral Trade Flows?

Abstract

Given that international specialization in production is reflected in trade, when trade flows are broken down regionally (destination of exports and origin of imports), the basket of exports from a capital-abundant country to a labor-abundant country would be expected to be more capital intensive than the basket of imports from the labor-abundant country. in the middle of the factor-endowment ranking will tend to specialize in producing commodities in the middle of the factor-intensity ranking. They will import labor-intensive commodities from more labor-abundant countries and capital-intensive commodities from countries with relatively higher capital-labor endowments. [Krueger, (1977) p. 9]. This formulation of the Heckscher-Ohlin hypothesis regarding a world with many countries and many commodities is investigated in this paper. I. The Model The models of Jones (1974) and'Krueger (1977) used as the basis for our investigation are characterized by many commodities, many countries (or many regions within which factor prices are equalized) and two factors of production. Each production function displays standard constant returns to scale and diminishing marginal product to each factor. In the model, factor-intensity reversals are excluded by assumption (a sufficient condition for this is that all production functions have the same elasticity of substitution). Preferences are identical and homothetic in all countries. The existing technology is common to all countries. In each country, production is efficient, i.e., on the production possibility frontier, with the implication that the domestic marginal rate of transformation between any pair of (produced) commodities is equal to the price ratio. Countries differ only between each other in their (fixed) factor endow