On the Dynamics of Comparative Advantage

Empirically, Heckscher-Ohlin (H-O) factor-intensity differences are of considerable importance when one examines recent changes in the composition of trade for major industrial nations. This evidence contradicts (i) the assertion of the new trade theory that north-north comparative advantage is determined by product differentiation and (ii) recent empirical research that it is driven by Ricardian productivity differentials. Here we test these three approaches to comparative advantage in a dynamic context using a panel of 11 industrialized countries, 13 sectors and 13 years. We find that trade patterns over time are best explained by a dynamic version of H-O, although Ricardian effects are also significant.