The Structure of Factor Content Predictions
The last decade witnessed an explosion of research into the impact of international technology differences on the factor content of trade. Yet the literature has failed to confront two pivotal issues. First, with international technology differences and traded intermediate inputs there does not exist a Vanek-consistent definition of the factor content of trade. Restated, we do not know what we are trying to explain! We fill this gap by providing the correct definition. Second, as Helpman and Krugman (1985) showed, many models beyond Heckscher-Ohlin imply the Vanek prediction. So what model is being tested? We completely characterize the class of models being tested by providing a familiar `consumption similarity' condition that is necessary and sufficient for the Vanek prediction. We illustrate with a unique dataset containing input-output tables for 41 rich and poor countries. We find modest support for the strong version of the Vanek prediction and impressive support for weaker versions of the prediction.