GLOBAL FACTOR TRADE: Conclusion
While our analysis has adjusted for the fact that average input coefficients shift with country factor proportions, we have not adjusted for differences in factor intensity between export and average sectors. This will tend to result in apparent missing trade.
Finally, and most obviously, trade barriers, demand irregularities, and non-neutral technological differences really do exist. Hence, it would be astonishing if we could ignore all of these and describe global factor trade flows perfectly. The real surprise is just how well we do.
The empirical validity of the factor proportions theory has been a focus of research for nearly one-half century. In the process, researchers have accumulated a great deal of experience that has informed our work. Leontief’s (1953) seminal work provided the first true factor content study. The work of Maskus (1985) and Bowen, Leamer and Sveikauskas (1987) is extremely important not only for the methodological contributions, but also for the extraordinary energy they brought to their studies. The same could be said of the work of Trefler (1993, 1995, 1997), which (among other contributions) provides extremely lucid characterizations of anomalies in the data. These important contributions notwithstanding, this half-century of empirical research failed to produce a set of simple departures that allow the theory to match the salient features of the international data.
Our study starts from a simple premise. Since the principal hypotheses of the nature of HOV’s failures in prior work concern technological differences and absorption patterns, it is crucial to address these directly on the relevant technological and absorption data. We develop a small set of hypotheses, some traditional, some novel, of why prior tests of HOV fail. We then estimate the crucial parameters directly from the relevant data and impose these restrictions on our empirical implementation of the HOV theory.
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Our results provide striking support for the HOV theory, suitably amended. Countries export their abundant factors and they do so in approximately the right magnitude. The results are extraordinarily consistent across specifications and are robust to changes in the sample.
Perhaps the most exciting feature of our results is the simple and unified picture they draw of the global economy. No doubt much is left out of our account. Yet it is startling that such a plausible and simple set of departures from the conventional model allows us to so accurately match the international data.