International Factor Price Differences: Leontief Was Right!

The factor price equalization hypothesis is widely at odds with the large variation in factor prices across countries. similarly, the Heckscher-Ohlin-Vanek theorem constitutes an incomplete description of trade in factor services: its predictions are always rejected empirically. These two issues are examined using a modification of the Heckscher-Ohlin-Vanek model that allows for factor-augmenting international productivity differences. The empirical results are stark: this simple modification of the Heckscher-Ohlin-Vanek theorem explains much of the factor content of trade and the cross-country variation in factor prices. Copyright 1993 by University of Chicago Press.