An Interpretation of the Factor Content of Trade

Abstract

This paper shows that the factor content of trade can be used as an indicator of the effects of trade on the relative prices of factors. The argument notes first that, under fairly general conditions, a trading equilibrium has the same factor prices as an equivalent autarky equilibrium that can be constructed by changing factor endowments by the amounts of the factor content of trade. Thus factor prices in two trading equilibria can be compared by comparing instead their two equivalent autarky equilibria. Since factor prices in autarky are related to factor endowments, it follows that factor prices with trade are related to its factor content. This relationship is formalized first in strong terms in a Cobb-Douglas model, and then in the weaker form of correlations in a more general model.