THE OBSERVATIONAL EQUIVALENCE OF THE RICARDIAN AND HECKSCHER-OHLIN EXPLANATIONS OF TRADE PATTERNS

Abstract

THiE Ricardian and Heckscher-Ohlin theories are usually seen as alternative explanations of the pattern of trade. The former emphasises inter-country differences in technology (specificially, in labour productivity), the latter differences in factor endowments as the basis for comparative advantage and therefore as the fundamental determinant of trade patterns. However, in a series of papers, J. L. Ford has argued that under certain conditions the two theories are in fact equivalent. This claim has generated considerable controversy, of which the exchange between Lloyd and Ford in this issue is the latest example, and in the present note I attempt to give a self-contained exposition of the issues involved. At the outset, it should be stressed that what is at stake is not the logical but the observational equivalence of the two theories. Under strict Ricardian assumptions, comparative advantage (meaning inter-country differences in autarky prices) and therefore trade patterns are determined by exogenous differences between countries in relative labour productivities. By contrast, Ford and the other participants in this debate have assumed for the most part that all the assumptions needed to guarantee both the Heckscher-Ohlin and the factor-price equalisation theorems hold. In particular, the available technology in a given industry is assumed to be identical in both countries. Hence, the techniques in use in an industry, and so its observed labour productivity, can differ between countries only as a result of inter-country differences in factor prices. In the light of this, differences in labour productivities may be correlated with differences in autarky commodity prices, but they cannot cause them.