HOV for China, Japan, Korea, and U.S.


∙ How did they publish all their papers in AER?

∙ Applying HOV to the specific region

     – East Asian countries and the US

∙ Bad prediction of HOV


Review of HO

HO Assumptions

∙ Homogeneous goods and factors

∙ Perfect competitive markets

∙ Production functions

     – CRTS

     – Non-joint Production

∙ Factors

     – Perfectly mobile across industries

     – Perfectly immobile across countries

∙ Countries differ in factor endowments, Industries differ in factor intensities

∙ Trade costs, if present, are constant (perhaps “iceberg”)


HO Results & Restriction

∙ FPE(Factor Price Equalization)

∙ Missing Trade – Too much trade, in both goods and factors

∙ By Chang’s Theorem – Chang(1979)

     – Indeterminacy of production and trade (k<n, in general)

     – Tendency to specialize (k<n, if prices are given arbitrarily)



∙ Under free trade, if HO assumptions hold, countries with sufficiently similar factor endowments will have exactly the same factor prices

∙ Implications:

     – Independent on own factor endowments

     – One-to-one relationship to foreign factor prices

     – Nontraded goods prices determined entirely by world prices of traded goods and not at all by nontraded good supplies or demands



∙ Specific factors(Ricardo-Viner Model)

∙ Armington Preferences – Trefler (1995)

     – Products are differentiated by country of origin

     – Examples: French wine, Italian shoes, Swiss watches

∙ Aggregation – Davis and Weinstein (2001)

∙ Monopolistic Competition, Heterogeneous Firms



∙ Observed industries are actually aggregates of unobservable industries with heterogeneous factor intensities

∙ Implications

     – Observed industries represent different mixes in different countries, leading to cross-country correlation between factor endowments and factor intensities, even with FPE

     – In a multi-cone model, even though countries specialize in actual industries, observed industries operate at positive output due to products that unobservably belong to another cone

     – In response to price changes, instead of a whole observed industry responding hypersensitively, only unobserved components do and observed industry responds gradually.


Literature Review


HOV Literature

∙ Trefler(1993, 1995)

     – International Factor Price Differences: Leontief Was Right!

     – The Case of the Missing Trade and Other Mysteries

∙ Trefler and Zhu(2000, 2005(6))

     – Beyond the Algebra of Explanation: HOV for the Technology Age

     – The Structure of Factor Content Predictions

∙ Antweiler and Trefler(2002)

     – Increasing Returns and All That: A View from Trade

∙ Davis and Weinstein(1997, 2000, 2001)

     – Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works (with Bradford and Shimpo)

     – International Trade as an “Integrated Equilibrium”: New Perspectives

     – An Account of Global Factor Trade

∙ Hakura(2001)

     – Why does HOV Fail? The role of technological differences within the EC


Basic Tests of HOV



∙ Sign Test

    sign F_{i}ⁿ = sign (V_{i}ⁿ-θⁿV_{i}),

    i = 1,,I, n=1,,N.

∙ Rank Test

    F_{i}ⁿ>F_{k}ⁿ ⇔ (V_{i}ⁿ-θⁿV_{i})>(V_{k}ⁿ-θⁿV_{k}).

∙ Slope Test: H₀:β=1


∙ Median Error Test


∙ Variance Ratio Test : if γ→ 0, “missing trade”, if γ→ 1, no missing trade.



Trefler(1993) JPE

International Factor Price Differences: Leontief Was Right!

    F_{i}ⁿ = e_{i}ⁿV_{i}ⁿ-θⁿ∑_{i=1}^{N}e_{i}ⁿV_{i}ⁿ,

    ((w_{i}ⁿ)/(e_{i}ⁿ)) = ((w_{i}^{n′})/(e_{i}^{n′})).

    ln w_{i}ⁿ=α+βln e_{i}ⁿ.


Trefler(1995) AER

The Case of Missing Trade and Other Mysteries

    Aⁿ = αⁿA^{US}, where αⁿ<1,

     A^{US}, the U.S. technology matrix.

∙ Missing Trade: the measured factor contents of trade are smaller than tradable endowments of factor content,




∙ Endowment paradox: rich countries run trade deficits, and poor countries run trade surpluses,


    ((V₁ⁿ)/(V₁))<<((V_{i}ⁿ)/(V_{i}))<<((V_{I}ⁿ)/(V_{I})), where n=1,,N.

∙ Investment, Services, and Nontradables(the endowments paradox)

     – βⁿ: ‘true’ consumption share, θⁿ<βⁿ for LDC, θⁿ>βⁿ for DC, rich countries consume less than θⁿ=((Yⁿ-Bⁿ)/Y) because of investment.

    F_{i}ⁿ=V_{i}ⁿ-βⁿV_{i}, s.t. ∑_{n=1}^{N}βⁿ=1.

∙ Armington Home Bias

     – Home Bias : a bias toward domestically produced goods,

    Dⁿ = θⁿ[αⁿYⁿ+α^{n}(Y-Yⁿ)],

    where αⁿ > 1, α^{n}<1.


Davis et al. (1997) AER

Using International and Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works

∙ FPE, IHP(Identical and homothetic preferences)

    A_{i}^{J}(I-B)⁻¹Tⁿ = V_{i}ⁿ-θⁿV_{i},

     = V_{i}ⁿ-θⁿA_{i}^{J}(I-B)⁻¹Y,

     = V_{i}ⁿ-((θⁿ)/(θ^{J}))A_{i}^{J}(I-B)⁻¹D^{J}.


Davis-Weinstein(2001) AER, (1998) NBER

    AⁿXⁿ-∑_{j}A^{j}M^{jn} = Vⁿ-θⁿV-[V^{nNT}-θⁿV^{NT}],

    AⁿXⁿ-∑_{j}A^{j}M^{jn} = Vⁿ-∑_{j}A^{j}M^{jn},

    ln(M_{i}^{jn}) = α_{0i}+α_{1i}ln(θ_{i}ⁿY_{i}^{n′})+δ_{i}ln(d_{jn′}).

∙ Caveat

     – Investment as a component of consumption

     – Fⁿ≡AⁿXⁿ-∑_{j}A^{j}M^{jn} is not the factor content of trade.


Davis-Winstein(2000) AER

International Trade as an “Integrated Equilibrium”: New Perspectives

    Fⁿ = A(Xⁿ-∑_{j}M^{jn}), with FPE,

    Fⁿ = AⁿXⁿ-∑_{j}A^{j}M^{jn}, without FPE.

∙ Intra-industry trade is a major conduit of net factor trade


Trefler-Zhu(2000) AER

Beyond the Algebra of Explanation: HOV for the Technology Age


∙ Diagnostics

     – ∑_{k∈N}A^{k}(D^{kn}-θⁿD^{kN}) are endogeneous

     – Examining the non-tradables specification brings the different result


Hakura(2001) JIE

    F¹-((θ¹)/(θ²))F² = V¹-((θ¹)/(θ²))V²+[A₂(I-B₂)⁻¹-A₁(I-B₁)⁻¹]D¹,

    where Fⁿ = Aⁿ(I-Bⁿ)⁻¹Tⁿ, for 1,2.

∙ Two Effects of Trade Barriers(EC 1970, 1980)

     – D¹=((θ¹)/(θ²))D², PIH doesn’t hold

     – FPE doesn’t hold







∙ Technology data

     – IO table: IDE-JETRO, Institute of Developing Economies – Japan External Trade Organization

∙ Factor Endowment and price

     – Labor

         * Endowment, Wage: International Labour Organization

         * Population: World Bank

     – Capital

         * The Penn World Table

     – Land

         * UN Food and Agricultural Organization

∙ Consumptions Share

     – WB(GNP, imports, exports)


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