Technology, trade and factor prices

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