An Account of Global Factor Trade

Abstract

1 Since Samuelson's work, theorists in the FPE tradition have continued to make important advances.They have explored the robustness of the original insight and re-interpreted the model in a manner suitable for empirical implementation.Samuelson (1953) extends the theory to multiple factors and goods.Jaroslav Vanek (1968) re-interprets the model as one of trade in factor services.Avinash K. Dixit and Victor A. Norman (1980) formalize an allegory from Samuelson (1949) to provide the deep economic intuition of the FPE model.Elhanan Helpman (1981) and Helpman and Paul R. Krugman (1985) demonstrate that the essential prediction for trade in factor services is robust to a variety of specifications with scale economies and imperfect competition.2 Just in the last few years it has been the preferred framework for a vigorous discussion of the impact of international trade on wages and employment [Krugman (1996), Leamer (1995), Lawrence and Slaughter (1993), Davis (1998)].Similarly, O'Rourke and Williamson (1994) have used it to study the consequences of Anglo-American commodity price convergence for factor price convergence.3 This ambition stands in stark relief when compared to that of the two other approaches that have dominated research in empirical trade.Leamer (1984) explored the empirical validity of the H-O model with FPE in the so-called "square" case.This has contributed importantly to our understanding of trade.However Leamer cautions that, in contrast to HOV empirics, these do not provide a "complete" test of the model, since it does not employ any data on technology.The importance of this caution is underscored by the recent work of Bernstein and Weinstein (1997), which confirms that the estimated parameters of the square model fail to have the structural interpretation theory imposes.The other principal approach to empirical trade is the gravity equation.While there are multiple general equilibrium theories that yield a gravity equation, 2 I. Global Factor Service Trade Theory strives to be simple, rich, and robust.When it succeeds, it attains extraordinary influence.No doubt this explains the ubiquity of Heckscher-Ohlin theory in the field of international trade, particularly in the Factor Price Equalization (FPE) version of Samuelson (1947). 1 Countless theoretical and empirical studies have built on this foundation.2The FPE theory's most impressive feature is its extraordinary ambition.It proposes to describe, with but a few parameters, and in a unified constellation, the endowments, technologies, production, absorption, and trade of all countries in the world.This juxtaposition of extraordinary ambition and parsimonious specification has made the theory irresistible to empirical researchers.3

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