Chapter 7: Factor endowments, trade and growth
This chapter considers a key proposition of neo-classical trade theory, considering whether countries trade on the basis of ‘factor endowments’, and goes on to ask whether they grow faster when they do so. This addresses what appears to be a gap in the existing literature. As discussed in the last chapter, mainstream approaches support trade, maintaining in particular that it fosters faster national growth. Such links between trade and growth have been extensively debated and while there is still argument, the balance of evidence supports some positive association. As will be explained below, following Heckscher and Ohlin (H–O), mainstream trade theory goes on to suggest that trade should be based on ‘factor endowments’. Here again there is a considerable literature, debating whether or to what extent countries do, in fact, trade on the basis of their endowments as Heckscher and Ohlin conceived them. Most studies stop at this point. They assume rather than investigate the link between the two ideas. The fact that the connections between trade and growth and between factor endowments and trade are at most statistical tendencies invites the crucial supplementary question of whether or to what extent trading based on factor endowments is good for growth. Some authors explicitly assume that trading on the basis of factor endowments is particularly beneficial.
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