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Differences in Total Factor Productivity and the Pattern of International Trade

Author

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  • Gerassimos Bertsatos

    (Laboratory of Applied Economics, Department of Economics, University of Western Macedonia, Fourka Area, 52100 Kastoria, Greece)

  • Nicholas Tsounis

    (Laboratory of Applied Economics, Department of Economics, University of Western Macedonia, Fourka Area, 52100 Kastoria, Greece
    School of Social Sciences, Hellenic Open University, 26335 Patras, Greece
    School of Economics and Management, Open University of Cyprus, Nicosia 2252, Cyprus)

Abstract

In this work, we develop a trade model that explains the pattern of trade between countries based on differences in total factor productivity (TFP) while also accounting for differences in relative factor endowments. The novelty stems from the introduction of production functions derived by combining the Ricardian and Heckscher–Ohlin–Samuelson (H-O-S) theories, with TFP differences serving as the basis of comparative advantage. To this end, a testable hypothesis is derived. For the empirical measurement of the TFP in each industry and country, a constant elasticity of substitution (CES)-type production function was employed, and the TFP was calculated as the Solow residual from the production function’s fixed term. To offer a better understanding, the model was tested for the bilateral trade between Germany and Russia, and Germany and the Czech Republic. It was found that TFP differences can be used as a basis for explaining comparative advantages and, consequently, the bilateral pattern of trade between two countries.

Suggested Citation

  • Gerassimos Bertsatos & Nicholas Tsounis, 2024. "Differences in Total Factor Productivity and the Pattern of International Trade," Economies, MDPI, vol. 12(4), pages 1-19, April.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:4:p:85-:d:1372731
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    References listed on IDEAS

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