Relativity in Trade Theory: Towards a Solution to the Mystery of Missing Trade

Abstract

Using OECD input output matrices consistently, we offer a tentative solution to the mystery of missing trade. First, we confirm the usual rejection of factor price equalization and identical technologies. Second, we develop a new technique to compute the factor content of trade when countries' technologies are different. Measuring factor content conventionally, we find a putative paucity of trade in these data. When factor content is measured correctly, theory predicts the direction and volume of trade more accurately. Thus measuring the factor content of trade according to the country of origin may vindicate the Heckscher-Ohlin-Vanek paradigm.