Judging Factor Abundance

Abstract

Recent theory casts doubt on the frequently used interindustry regression method of inferring a country's abundant factors. The empirical importance of these theoretical qualifications is examined by comparing regression-derived estimates of factor abundance with both revealed and actual factor abundances for 35 countries and 12 resources. The theoretical importance of trade imbalances for the reliability of the regression estimates is demonstrated, and a theoretically consistent trade imbalance correction is proposed and implemented. The results indicate that, despite valid theoretical concerns, the regression estimates are generally reliable indicators of revealed factor abundance. Therefore, the innumerable regression studies conducted over the past 30 years can be considered to provide reliable evidence concerning the validity of the factor abundance theory.