Empirical Analysis

Abstract

In Section 2.2, we derived the value version of the HOV model, which allows for different factor productivities and factor returns across countries, while the technology parameters $\theta _i^h$, the cost shares of factor h in industry i, are taken to be identical across countries. The HOV equation for a particular country j is (according to (2.18)):

$${\Theta ^T}{t^{jv}} ={W^j}{\overset{\lower0.5em\hbox{$\smash{\scriptscriptstyle\leftharpoonup}$}}\to {v} ^j}\sum\limits_j {{W^j}{{\overset{\lower0.5em\hbox{$\smash{\scriptscriptstyle\leftharpoonup}$}}\to {v} }^j}} $$

((1))

where t^v is the vector of net exports in value terms, Ɵ^T is the matrix of total (direct plus indirect) factor cost shares, W is a diagonal matrix of factor returns, v̄ is the vector of factor endowments, and a superscript j denotes countries. The above equation predicts that the total factor content of trade in value terms (Ɵ^T t^jv) is a linear function of national (W^jv̄^j) and world factor endowment income $\sum\limits_j {{W^j}{{\overset{\lower0.5em\hbox{$\smash{\scriptscriptstyle\leftharpoonup}$}}\to {v} }^j}}$.