OCOB Ann Rep 07-08 - Orfalea College of Business - Cal Poly San ...

FACULTY REPORTSFigure 1: Measuring Factor Content$1 million oftextile production equalspayments for ...... the services of $2.5 millionworth of capital(land, buildings, machinery)... the services of 14 workersfor one year.supply of labor and capital relative to the world supply. Alabor abundant country like China will only export the servicesof its “excess labor”. The excess is determined by subtractingfrom the country’s total labor supply the servicesof labor that the country will itself consume. For example,China accounts for 9 percent of world consumption, soChina is predicted to export the services of its own laborsupply of 720 million less what it uses in producing for thehome market, equal to 0.09 times the world labor supply ofabout 1.4 billion consumption (as measured by my sampleof 33 countries). Hence China is predicted to export theservices of almost 600 million workers!Many empirical studies of the Heckscher-Ohlin modelhave shown that these predictions vastly over-predict thefactor content of world trade, and China is no exception. Infact, if we assume labor is as productive in China as in theU.S., my research indicates as of the year 2000 China onlyexported the services of 1.9 million workers. Of course thequestionable assumption is that China’s labor is equivalentto U.S. labor. Table 1 demonstrates that if wages are any indication,labor in the U.S. is much more productive thanlabor in China. A more subtle feature of this data is thatthese differences in productivity vary across sectors.A key element of my research is how to best accountfor differences in factor productivities when predicting thefactor content of trade. Using input output data, I first determinehow much U.S. labor and capital using U.S. productiontechniques would be necessary to produce China’sGDP. By comparing this to the actual amount of China’slabor and capital, I can determine the productivity ofChina’s labor and capital relative to the U.S. These productivityadjustments equate one person-year of labor in theUnited States to about 17 person-years of labor in China.Once these differences are taken into account, China ispredicted to export the services of only 3.3 million “U.S.equivalent” workers, much closer to China’s measured laborcontent.The productivity-adjusted Heckscher-Ohlin predictionsof the factor content of trade are highly accurate for mostcountries. In a group of 33 countries, the predictions correctlydetermine whether a country will export labor orcapital in 59 of 66 possible cases. The predictions also rankcountries from largest factor exporter to largest factor importerwith a high degree of accuracy when compared to themeasured factor content rankings. The range of productivitydifferences among countries reflects different skills of theworkforce and different areas of industrial expertise thatconfer comparative advantage over and above the numberof workers or the dollar value of capital, as Ricardian tradetheory first suggested. China has gained world ascendancyexporting labor-intensive goods with a very low level oflabor productivity. As China’s labor force improves in skills,China’s role in world trade will continue to evolve, but nodoubt remain momentous. ■ORFALEA COLLEGE OF BUSINESS ❚ 23