Technology, trade and factor prices

The view that recent changes in the distribution of income primarily reflect technology rather than trade may be the majority opinion, but has been harshly criticized by some trade economists. This paper will argue that the critique in fact misses the point, essentially because the critics undertake the wrong thought experiments. Trade volumes are not irrelevant: if one poses the question correctly, one immediately realizes that small trade volumes are inconsistent with a story that attributes large distributional effects to trade. The factor bias of technological change is not immaterial, except in the case where such change takes place in a small open economy (as opposed to one that can affect world prices), and where technical change occurs only in that economy (rather than occurring simultaneously in other economies as well); since the real situation does not meet either criterion, factor bias definitely does matter. Most surprisingly, the much maligned use of a factor content approach to infer the effects of trade on factor prices turns out to be an entirely justified procedure when carefully applied. (C) 2000 Elsevier Science B.V. All rights reserved.