Diversification Cones, Trade Costs and Factor Market Linkages

60 Pages Posted: 7 Feb 2006

See all articles by Chong Xiang

Chong Xiang

Purdue University - Krannert School of Management

Date Written: December 2004

Abstract

This paper finds non-uniform differences in the distribution functions of factor usage intensities among 10 rich OECD countries: countries form 3 distinct groups (e.g. UK, France and US in different groups) such that the differences are more pronounced across groups than within the same group, and capital abundant countries are in capital abundant groups. The estimation works even if the same industry codes represent different goods across countries in the data. This pattern is consistent with the multiple-cone factor proportions theory with zero trade costs. An alternative interpretation involves high trade costs across the 3 groups of countries: 40% ~ 70% on ad valorem basis to invalidate the multiple-cone interpretation and 60% ~ 100% to account for all the observed differences in factor usage intensities. These high trade costs illustrate how badly factor price equalization is violated for the 10 OECD countries. Both interpretations share one implication: factor market linkages are weak between the countries in different groups.

JEL Classification: F1

Suggested Citation

Xiang, Chong, Diversification Cones, Trade Costs and Factor Market Linkages (December 2004). Available at SSRN: https://ssrn.com/abstract=881077 or http://dx.doi.org/10.2139/ssrn.881077

Chong Xiang (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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