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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Factor Supplies and Specialization in the World Economy
James Harrigan and Egon Zakrajsek

Abstract: A core prediction of the Heckscher-Ohlin theory is that countries specialize in goods in which they have a comparative advantage, and that the source of comparative advantage is differences in relative factor supplies. To examine this theory, we use the most extensive dataset available and document the pattern of industrial specialization and factor endowment differences in a broad sample of rich and developing countries over a lengthy period (1970-92). Next, we develop an empirical model of specialization based on factor endowments, allowing for unmeasurable technological differences and estimate it using panel data techniques. In addition to estimating the effects of factor endowments, we also consider an alternative hypothesis that the level of aggregate productivity by itself can explain specialization. Our results clearly show the importance of factor endowments on specialization: relative endowments do matter.

Keywords: Heckscher-Ohlin theory, comparative advantage, relative factor supplies

Full paper (1183 KB PDF)

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Last update: October 26, 2000