An Empirical Demonstration of Classical Comparative Cost Theory
Author(s): Bela Balassa
Source: The Review of Economics and Statistics, Vol. 45, No. 3 (Aug., 1963), pp. 231-238
Published by: The MIT Press
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AN EMPIRICAL DEMONSTRATION OF CLASSICAL
COMPARATIVE COST THEORY*
Bela Balassa
E CONOMIC theory can be regarded as
consisting of a number of models designed
to explain economic phenomena and to yield
predictions for the future. Any choice among
alternative models should be based on their
explanatory value- a model (or hypothesis)
can be regarded as superior to another if it
better explains actual phenomena and it is more
helpful in predicting future events.
The theory of international trade abounds in
theoretical models, some of them complementary,
others conflicting. Alternative approaches
towards explaining the causes of international
specialization are followed, for example, by
classical economists on the one hand, and by
Heckscher and Ohlin on the other. While the
hypothesis advanced by the former presupposes
the existence of inter-country differences in
production functions, the latter assume identical
production functions and qualitatively
identical factors of production in the trading
countries and attribute international specialization
to differences in factor endowments.
The empirical testing of the Heckscher-Ohlin
hypothesis by Leontief led to inconclusive results,
and the interpretations and explanations
given to the Leontief paradox have demonstrated
that the assumptions of this model require
modification.' In the present paper, we
will not attempt to test the Heckscher-Ohlin
hypothesis, but will rather inquire into the
validity of the classical model.
According to the original formulation of the
classical theory, comparative advantage based
on relative productivity differentials determines
international specialization. It has subsequently
been realized that inter-country differences in
the wage structure and in the capital-labor ratios
of various industries may compensate for productivity
differentials; a country possessing
a relative productivity advantage in a particular
industry may still import the commodity
in question if it paid relatively higher wages
and/or had higher capital costs per unit of
output in that industry.2 Still, the defenders of
classical theory - among others, Taussig expressed
the opinion that the latter factors
are not sufficiently important to warrant significant
changes in the trade pattern as determined
by relative differences in productivity.3
Let us adopt the following notation:
C= unit cost
A = labor input per unit of output
W wage rate
T ratio of capital plus labor costs to
labor costs
Subscripts I and II refer to country I and
country II, respectively.
Capital letters refer to commodity X,
small letters to commodity Y.
The modified classical hypothesis can now
be written:
If
A, a,
< , (I)
All all
it is likely also that
CI CI
, , (2)
CIw CIl
when the latter exDress'ion is equivalent to
* This paper was prepared during the tenure of a research
grant from the Economic Growth Center at Yale
University in the summer of ig6i. The author wishes to express
his appreciation to Marnie Mueller who has cheerfully
borne the burden of data collecting and computations and
also made helpful comments on an earlier version of the
paper. Further thanks are due to Michael Lovell for valuable
suggestions and criticism.
1 W. W. Leontief, "Domestic Production and Foreign
Trade: The American Capital Position Re-examined,"
Economia Internazionale, (February 1954), 9-38; "Factor
Proportions and the Structure of American Trade: Further
Theoretical and Empirical Analysis," this REVIEW, XXXVIII
(November I956), 386-407. Also, P. T. Ellsworth, "The
Structure of American Foreign Trade: A New View Examined,"
this REVIEW, XXXVI (August I954), 279-285; Stefan
Valavanis-Vail, "Leontief's Scarce Factor Paradox," Journal
of Political Economy, LXII (December I954), 523-528; N. S.
Buchanan, "Lines on the Leontief Paradox," Economia
Internazionale (November I955), 79I-794; and the discussion
in the supplement to the February I958 issue of this
REVIEW, by Stefan Valavanis-Vail, Romney Robinson, G. A.
Elliott, Beatrice Vaccara, and W. W. Leontief, III-I22.
2 For references, see Jacob Viner, Studies in the Theory
of International Trade (New York, I937), 493-5I2.
'F. W. Taussig, International Trade (New York, I927),
43-68.
[ 231 ]
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232 THE REVIEW OF ECONOMICS AND STATISTICS
XAIWIT, a,witI(3)
AVIIWIITII a11w11t11
Consequently, country I will export commodity
X, and country II will export commodity Y.
In order to test the classical hypothesis,
MacDougall compared relative export volumes
and relative productivity differences for American
and British manufacturing industries, and
found that in 20 out of the 25 industries examined,
"where American output per worker
was more than twice the British, the United
States had, in general, the bulk of the export
market, while for products where it was less
than twice as high the bulk of the market was
held by Britain." I At the same time, relying
on data of I3 industries MacDougall concluded
that although we can, to some extent, better
explain differences in export shares if considering
unit labor costs instead of productivity,
productivity differentials are but scarcely modified
by wage disparities.5
The present paper can be regarded as a continuation
of MacDougall's work, with differences
in the choice of data and in methodology.
Whereas MacDougall relied on Rostas' productivity
estimates for the 'thirties,6 we will
make use of Paige and Bombach's more inclusive
observations that refer to I950.7 At
the same time, we will attempt to reach some
conclusions as to the relative importance of
productivity, wages, and capital costs in determining
the pattern of exports.
Productivity and Exports
American and British productivity comparisons
have been made by Paige and Bombach
for 44 selected industries that include about
one-half of manufacturing production in the
two countries.8 Productivity is measured as
net output (gross output minus purchased inputs
other than labor) per worker.9 The index
numbers for productivity (U.K.= ioo) are
calculated separately at U.S. and U.K. prices
and a geometric average of these figures is
taken.
For the purposes of the present investigation,
it was necessary to exclude several industries
from the sample. First, industries whose
output did not exceed one-third of one per cent
of the value of manufacturing production in
the two countries have not been included since
these industries are not representative of manufacturing
as a whole. In the absence of the
necessary information, the same procedure was
followed with regard to industries processing
agricultural raw materials, such as grain milling,
canning, and breweries, because easy access
to such materials affects export possibilities but
not the net output per worker. Finally, we had
to disregard electrical household equipment and
passenger automobiles since in the period under
investigation third countries discriminated
against American consumer durables as compared
with British. Our sample thus covers 28
industries which produced 43. I per cent of
manufacturing output in Britain and 4I.4 per
cent in the United States.
Relative productivity differences in these
industries are compared with their export performance
in the two countries.10 In comparing
American and British exports we exclude trade
between the two countries themselves since this
is obviously greatly influenced by the relative
height of American and British tariffs. In
other words, we ask the question to what extent
productivity differences determine the success
of U.S. and U.K. industries in exporting
to third countries. No attempt will be made,
however, to correct for the differential effects
of Commonwealth preference, discrimination
against American goods other than consumer
durables, and locational factors. It would be
difficult to give numerical expression to these
influences in the present context; they should
therefore be used as qualifications to the results
derived from the model.
4 G. D. A. MacDougall, "British and American Exports:
A Study Suggested by the Theory of Comparative Costs,"
Part I Economic Journal LXI (December I95), 697-698.
Ibid., 706-707.
a L. Rostas, Comparative Productivity in British and
American Manufacturing (Cambridge, I948),
'Deborah Paige and Gottfried Bombach, A Comparison
of National Product and Productivity of the United Kingdom
and the United States (Paris: Organisation for European
Economic Co-operation, I959).
'The industries were selected on the basis that productivity
comparisons for these are considered reliable inasmuch
as the inter-country output comparison is relatively good
and employment data are not likely to be subject to substantial
errors resulting from differences in classification.
'Depreciation is not deducted from the net output figures,
hence net output also equals value added plus depre-
ciation.
10The sample includes 48 per cent of British and 4I per
cent of American manufacturing exports.
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CLASSICAL COMPARATIVE COST THEORY 233
Further problems arise in determining the
ratio of American to British exports. Theoretically,
one should deal with export quantities
rather than export values. This is what MacDougall
attempted to do. However, he ran into
difficulties in regard to heterogeneous commodity
groups that comprise by far the larger
part of his sample in terms of production value.
In some cases, he used value data (machinery,
outer clothing), in others, a system of weighting
(motor cars, leather footwear, hosiery). Both
of these solutions entail errors, and one could
also question the advisability of mixing quantity
and value data in the same sample.
Because of the unreliability of quantity comparisons
in most of the industries included in
our sample, we have chosen to work with export
values. In other words, we propose to
investigate the impact of productivity differences
on export shares in third markets. By
doing this we implicitly assume that the elasticity
of substitution between American and
British exports of the same commodity (or
commodity group) 11 exceeds unity, since
substitution elasticities equal to or less than
unity would lead to inconclusive results. To
give an example, if productivity ratios were
equal to price ratios, and the elasticity of substitution
between the two countries' exports
11 The elasticity of substitution between American and
British exports of a given commodity is
d qI PIA
'qI PII d log (ql/q,,)
d PI q, ) d log (pI/pII)
PII qiI
when I and II refer to American and British, respectively.
TABLE I. -AMERICAN AND BRITISH PRODUCTIVITY, WAGES, UNIT COSTS, AND EXPORTS
Export Output per Wage Unit Labor Net Unit
Value Worker Ratio Cost Cost Ratio
$ per ? per ? $ per L
U.K. = IOO U.K. = IOO U.K. = IOO U.K. = IOO U.K. = IOO
Industries (I) (2) (3) (4) (5)
I. Woolen and worsted 2.7 I85 IOI7 550 335
2. Shipbuilding and repairing 20.9 III 899 8io 802
3. Cement 3I.4 ii6 756 652 572
4. Structural clay products 40-9 I97 804 408 498
5. Tanneries 48.9 i68 904 538 370
6. Footwear, except rubber 66.5 I7I 805 47I 440
7. Cotton spinning and weaving 68.4 249 928 373 280
8. Tools and implements 77.3 I90 I04I 548 570
9. Tires and tubes 84.9 24I IOI4 42I 438
io. Knitting mills 86.3 I87 9I4 489 359
ii. Rayon, nylon, and silk 87.8 226 958 424 354
I2. Iron and steel foundries 92.6 202 928 459 398
I3. Bolts, nuts, rivets, screws 94.7 256 I223 478 523
I4. Wirework I03.4 244 I042 427 409
I5. Outerwear and underwear II0.9 I70 ioi6 598 535
i6. Soap, candles, and glycerine II4.8 249 IIOI 442 58I
I7. Generators, motors, transformers II7.6 239 998 4I8 466
I8. Rubber products, except tires and footwear I36.3 250 IOI3 405 393
I9. Blast furnaces I86.9 408 828 203 3 70
20. Radio I9I.4 400 948 237 29I
2I. Steel works and rolling mills I96.6 269 879 327 338
22. Automobiles, trucks, and tractors 205.7 466 942 202 247
23. Basic industrial chemicals 2I3.2 372 947 255 322
24. Pulp, paper, and board 233.9 338 I02I 302 297
25. Metal-working machinery 277.5 22I iio8 50I 459
26. Containers, paper and card 290.4 428 II46 268 229
27. Agricultural machinery, except tractors 29I.8 429 958 223 224
28. Paint and varnish 320.I 363 98o 270 255
SOURCE:
Column I:
Great Britain, Customs and Excise Department, Annual Statement of the Trade of the Uneited Kingdom, I954, Compared with the
Years 1951-1953, III (London: Her Majesty's Stationery Office, I956).
United Nations, Statistical Office, Commodity Trade Statistics, January-December I95i (New York, I952).
United Nations, Statistical Office, Yearbook of International Trade Statistics, 1952 (New York, I953).
United States, Bureau of the Census, Report No. FT4Io, United States Exports of Domestic aned Foreign Merchandise, Calendar Year
195i, Parts I and II (Washington, I952).
Columns 2, 3, 4, and 5:
Paige, Deborah, and Gottfried Bombach, A Comparison of National Output and Productivity of the United Kingdom an7d the United
States (Paris, OEEC, I959).
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234 THE REVIEW OF ECONOMICS AND STATISTICS
were unity, export values would be identical.
The findings of Kubinski, MacDougall, and
Zelder indicate, however, that elasticities of
substitution significantly exceed unity.12 Therefore,
it can be expected that -if a positive
correlation between productivity and export
quantities exists - relative productivity advantages
will lead to larger export shares.13
The export data used in the calculations refer
to I95I. This year has been chosen partly
because we can expect a lag between changes
in productivity and changes in export shares,
partly because export values in I950 do not
yet reflect the full effect of the I949 devaluation.
Separate calculations were made for the
years I954-56.
The relevant data are found in columns (i)
and (2) of Table i. The scatter diagram,
plotted on a natural scale (Chart i) gives indication
of a definite relationship between the
two variables. As a first approximation, a
straight line regression was fitted to the data,
CHART I. - U.S./U.K. EXPORT AND PRODUCTIVITY
RATIOS I950 AND I95I (NORMAL SCALE)
EXPORTS
300 .0
200
100 *.
too/ .
7..
0 100 200 300 400 500
LABOR PRODUCTIVITY
reflecting the hypothesis that there is a linear
relationship between productivity ratios and
export ratios. Introducing the symbols, E for
export value and P = i/A, the regression equation
will assume the following form:
E -53-32 + .72 P (I)
EII .7 I 03 i )4
Thus, on the average, an increase in the U.S.U.K.
productivity ratio from 200 to 220 would
lead to an increase of the ratio of export values
to third countries from 9I to I05, and the
value of American and British exports would
become equal in an industry where American
productivity exceeded British productivity by
II3 per cent.
The correlation coefficient between productivity
ratios and export ratios is .8o; in other
words, 64 per cent of the variance in export
shares can be explained by differences in productivity.
Since the coefficient of linear correlation
might be influenced by extreme values,
we also calculated the Spearman rank correlation
coefficient. This gives the value of .8i,
indicating that extreme values did not have an
appreciable influence on r.
The next question concerns the reliability of
the results. We have calculated the confidence
interval for the linear correlation coefficient
with the use of Fisher's z-transformation. This
gives the limits of .6o-.9o for r, at the 5 per
cent confidence level. However, we should note
that, for the purposes of the present investigation,
statistical methods are of limited usefulness
in determining what significance can be
attached to the estimates, since these presuppose
random sampling from a bivariate normal
distribution of the variables in question. Although
we can assume that the underlying distributions
approach a normal curve, the group
of industries investigated cannot be regarded
as a random sample.
Approaching the problem of reliability in a
different way, we note that our sample includes
40-45 per cent of manufacturing production
and exports in the two countries; hence it may
give a reasonably good approximation for
manufacturing as a whole for the period under
consideration. It is a different problem whether
the same relationship would apply to years
other than the ones chosen since the results are
affected by errors due to variables not included
in the analysis and by observational errors
in the independent variable. Productivity data
are available only for I950, but these can be
compared with trade figures for later periods.
12 A. Kubinski, "The Elasticity of Substitution between
Sources of British Imports, I92I-38," Yorkshire Bulletin of
Economic and Social Research (January I950), I7-29:
MacDougall, op. cit.; R. E. Zelder, "The Elasticity of Demand
for Exports, I92I-38" (unpublished doctoral dissertation,
University of Chicago, I955), cited in A. C. Harberger,
"Some Evidence on the International Price Mechanism,"
Journal of Political Economy, LXV (December I957), 5o6-
2I.
13 Still, our results will be influenced by inter-commodity
differences as regards the elasticity of substitution.
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CLASSICAL COMPARATIVE COST THEORY 235
Surely, the comparison has only limited validity
since we disregard possible changes in productivity,
but it will still be of some interest if
we can assume that year-to-year changes in
productivity are small or that export trade
follows variations in productivity with a comparatively
long time lag. We have proceeded
to calculate the correlation between the variables
in question using export data for I954-
56,1' and arrived at r .73. Considering the
differences in the two time periods, the results
are remarkably close and suggest the relative
constancy of the observed relationship.
In the above discussion we have assumed the
existence of a linear relationship between the
variables considered. However, the scatter
diagram of Chart i indicates increasing deviations
from the regression line as the values of
observations increase, suggesting that a logarithmic
relationship may provide a better fit.
If this were so, a one per cent increase in productivity
ratios would be associated with a
given percentage change in export ratios.
The observations - with one exception
are plotted on a logarithmic scale in Chart 2
and show a close relationship. The exception
is the wool industry in which American exports
amount to only a small fraction of British exports.
The deviation of the data of this industry
from the observed pattern is explained by
the fact that Britain has differential advantages
over the United States in manufacturing woolens
inasmuch as she can procure wool at a
lower price from Commonwealth countries
(Australia and New Zealand) and, also, the
quality of British wool products is greatly
superior to the American. The difference in
quality suggests that the reliability of the comparison
is greatly reduced by the differentiation
of the product.
If we exclude the wool industry from the
investigation, the regression equation takes the
form,
E1 PI
log - = -I.76I + I.594 log - (5)
Eu, (O.I8I ) PIr
Thus, a one per cent change in productivity
CHART 2. - U.S./U.K. EXPORT AND PRODUCTIVITY
RATIOS I950 AND I95I (LOGARITHMIC SCALE)
EXPORTS
400 -
300.
200.
100 _
80
60 .'
40/
20
.5 1 2: 4 6 8 10
(In HundredS) LABOR PRODUCTIVITY
ratios leads to an approximately i.6 per cent
change in the ratio of export values between
the two countries. The coefficient of correlation
is .86, with confidence limits of .73-.94 at
the 5 per cent level of significance. The coefficient
of determination is .74; that is, 74 per
cent of the variance in export ratios can be explained
by relative productivity differences.'5
Productivity, Wages, and Exports
The next question to be answered is whether
the explanation of export ratios given here
can be improved upon if we consider not only
productivity differences but also wage ratios as
the determinants of export shares. Wage ratios
(U.S./U.K.) are found in Column (3) of Table
i. A multiple regression equation can be fitted
using productivity ratios and wage ratios as
independent, and the ratio of export values as
dependent, variables, since no multicollinearity
is present. (The coefficient of linear correlation
between productivity ratios and wage
ratios is .20.)
Assuming additivity in the effect of the independent
variables on export shares, the regression
equation will take the form,
- -18I.2 + .69 I -+ .I40 EII
(.I67) P11 (.IO2) WI,
(6)
'4 The choice of these years was given by the availability
of the data for purposes of a different investigation. Since
discrimination against American consumer durables abated
by I 54, electrical household equipment and automobiles
were included in our sample.
15 If the wool industry were included in the calculations,
the correlation coefficient would be .78.
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236 THE REVIEW OF ECONOMICS AND STATISTICS
The multiple correlation coefficient is .8i, compared
with .8o for the simple correlation coefficient.
The two values become equal if the
adjustment suggested by H. Theil for specification
analysis is made.'6 The partial coefficient
of correlation between productivity and
exports is .77, between wages and exports .24.
The latter coefficient is not significant at the 5
per cent confidence level.
The explanatory value of wage differentials
as regards to differences in export values
changes but little if we fit a logarithmic equation
to the data.
log = -5.I64 + I.457 log
El, (.328) PII
WI
+ I.250 log . (7)
(.566) WII
Again, there is no significant difference between
the multiple correlation coefficient (R = .88)
and the simple correlation coefficient (r = .86).
The partial coefficients of correlation are: between
productivity and exports, .84; between
wages and exports, .i i - the latter is not significant
at the 5 per cent level.'7
These results indicate that a definite relationship
between wage ratios and export shares
cannot be established. Productivity advantages
are not counterbalanced by higher wages paid
in industries with higher productivity, and productivity
differences continue to account, in a
large measure, for differences in export shares.
Actually, there is some - although largely inconclusive
- evidence that higher relative
wages might be associated with higher export
shares.'8 If this were so, a possible explanation
would be that greater success in exportation
may lead to higher wages. This implies that
the relationship between wages and export
shares is by no means uni-directional; while
lower wages could conceivably lead to higher
export shares, higher export shares may also
make possible paying higher wages.
Unit Costs and Exports
We come now to the question of whether our
r,iiltq could bh imnrov&d irnon bv incluidinpr
capital costs in the estimates. At this point we
encounter statistical difficulties, however. The
available data do not provide information on
capital cost per unit of output but only on
"net costs," inclusive of profits. Net costs as
defined by Paige and Bombach are equivalent
to net output so that net costs per unit of output
refer to value added plus depreciation per
quantity of output. We will make use of these
figures in the following (see Table i, col. (5)),
while the implications of this procedure will be
noted at a later point.
Chart 3 shows the tendency of export shares
to favor the country with the lower relative net
unit costs. As a first approximation, we have
again fitted a straight line regression of the
form
E, =299.8 - 40 (8)
F11 (.103)N1(8
when N refers to net unit costs as defined
above. The correlation coefficient between the
two variables is -.6o, with confidence limits of
-.28 to -.8o at the 5 per cent level of signifi-
cance.
CHART 3. - U.S./U.K. EXPORT AND NET UNIT COSTS
RATIOS I950 AND I95I (NORMAL SCALE)
EXPORTS
300 .
200
0 ~200 300 400 500 600 700 800
NET UNIT COSTS
We find a closer relationship between net
unit costs and export values if the relevant data
are plotted on a logarithmic scale (Chart 4).19
Fitting a logarithmic regression to the observations,
this will assume the form
log El 6.I62 - I.590 log - (9)
El, (.30I) NII
Thus, a one per cent increase in the ratio of
net unit costs would lead to an approximately
I.6 per cent reduction in the ratio of export
values. The coefficient of correlation is -.71,
with confidence limits - .44 to -.86 at the 5
per cent level of significance. Thus, a little
16 See his Economic Forecasts and Policy (revised edition;
Amsterdam I96I), 2IO if.
17 The wool industry was excluded in estimating the
regression equation.
18 See also I. B. Kravis, "Wages and Foreign Trade,"
this REVIEW, XXXVIII (February I956), 30.
"As in all logarithmic regressions, the wool industry is
excluded from the data.
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CLASSICAL COMPARATIVE COST THEORY 237
CHART 4.- U.S./U.K. EXPORT AND NET UNIT COSTS
RATIOS I950 AND I95I (LOGARITHMIC SCALE)
EXPORTS
400 -
300 -
200_
100 _
80 -
60 -
40 -
20
I 1 2 4 6 8 10
(In Hundreds) NET UNIT COSTS
over 50 per cent of the variance in export
values can be explained by differences in net
unit costs.
The results show that a one per cent increase
in productivity ratios or in net unit cost
ratios leads to a I.6 per cent change in the
ratio of export values. At the same time, the
correlation coefficient between productivity
ratios and export shares appears to be higher
than between net unit cost ratios and export
shares.
The first question to be answered is whether
the difference between the two coefficients
(taken without sign) is significant. For the
normal regression, the correlation coefficients
are .8o and -.6o, respectively; for the logarithmic
regression, .86 and - .7I. The value of T
is I.44 in the first case and I.5I in the second.20
Deviations of such magnitude could occur in
a normal distribution I3-I5 times in ioo cases.
Hence, the differences between the observed
values of the coefficients does not appear to be
significant. However, doubts may arise about
the application of this test to the problem at
hand, since it presupposes random sampling.
If we consider that the difference in the correlation
coefficients is maintained if export
values for I954-56 are used in the calculations,21
it would appear that this difference
might not be due to random factors.
If we assume that there is a significant difference
between the correlation coefficients, we
face the further problem of indicating why the
relationship between productivity and exports
is closer than that between net unit costs and
exports. A possible explanation is that industries
with greater success in export markets
enjoy higher profits and this reduces the negative
correlation between net costs and exports.
This hypothesis would take care of market imperfections
that lead to different rates of profits
in various industries, but it would require
further justification.
Evaluation of the Empirical Results
The evidence presented indicates that there
is a high correlation between productivity
ratios and export shares, and the introduction
of further explanatory variables only slightly
modifies the results. On the one hand, there is
inconclusive evidence that inter-industry wage
differences would appreciably affect export
shares; on the other, differences in capital cost
per unit of output do not seem to have a significant
influence on export performance. These
results may be surprising to many, although
they appear by no means implausible.
Two possible explanations can be given for
the absence of a correlation between wage
ratios and export shares. Taussig advanced the
proposition that the hierarchy of wages in
different countries is largely similar because
there is little competition between the labor
force of various industries (non-competing
groups) and inter-industry wage-differences
are determined by the disutility and regularity
of work, the required strength and skill, and
other factors all of which act in basically the
same way in all countries.22 On the other hand,
I. B. Kravis argued that the labor groups in
various occupations do compete with each other
and, consequently, in any one country, wage
differences are considerably smaller than productivity
differences.23
As to the first explanation, Stanley Lebergott
has shown that, in the years immediately
20 For a description of this test, see F. C. Mills, Statistical
Met,hnd. (New Vork- TtCC )-n6-CZnI7
21 The correlation coefficient between productivity an
exports is .73, while between net unit costs and exports
this is -.44, if export data for I954-56 are used and the
variables are expressed on a normal scale.
220p. cit., 43 ff.
23 " 'Availability' and Other Influences on the Commodity
Composition of Trade," Journal of Political Economy,
TXTV (Anril IOC6). TA6
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238 THE REVIEW OF ECONOMICS AND STATISTICS
following the Second World War, inter-industry
wage patterns were almost identical between
the United States, the United Kingdom, and
Canada, and differed only slightly for Sweden.24
Similar results have been reached for the
United States and Japan by I. B. Kravis.25 At
the same time, it has been shown that - compared
with productivity differences - wages
paid in different industries tend to cluster
around the national average.26
In our sample, the coefficient of variation is
37.I for productivity ratios and I0.7 for wage
ratios. This result is in conformity with the
argumentation of both Taussig and Kravis,
since the low degree of dispersion in wage
ratios may be due to similarities in the wage
patterns of the two countries, to small interindustry
wage differences in the individual
countries, or to a combination of both. Under
the latter alternative, one would argue that
although different occupational groups are to
some extent in competition with one another,
the inter-industry wage pattern is still determined
by factors such as the skills required
in particular industries, that act in a similar
fashion in every country. In other words, there
is no need for assuming the existence of noncompeting
groups in order to explain the similarity
of the inter-industry wage pattern in
various countries.
The absence of correlation between wage
ratios and export shares appears to refute the
arguments of those who believe that cheap
wages have played an important part in determining
export patterns in manufacturing industries.27
At the same time, our results do not
establish the frequently-argued correlation between
productivity and wages either, considering
that the correlation coefficient between productivity
ratios and wage ratios is .20.
With respect to the relationship between
capital costs and export performance, a frenuent
misunderstanding should be noted. Bertil
Ohlin asserted that the classical economists
were guilty of neglecting the capital factor, and
in his criticism Ohlin referred to the existing
large inter-industry differences of capital-labor
ratios. In the United States, for example, the
amount of capital per worker was said to vary
between $io,ooo in the chemical industry and
$I,700 in tobacco manufacturing. 28 However,
in determining the competitive position of any
industry, capital costs per unit of output rather
than capital-labor ratios are relevant. And it
is by no means necessary that high capital
costs per unit of output would be accompanied
by high productivity, considering that the application
of more advanced technological methods
associated with higher capital intensity
may reduce rather than increase the cost of
capital per unit of output in modern plants.
In other words, a high capital-labor ratio may
correspond to high productivity of labor and
capital as well. In fact, this result has been
reached by Marvin Frankel, who found a slight
association between low unit labor costs and
low unit capital costs in a cross-section study
of American and British industries.29 Finally,
even if we assumed a negative correlation between
labor productivity and capital costs, the
importance of the capital factor in determining
trade patterns would be reduced if the hierarchy
of industries with regard to capital intensity
were similar in individual countries.
In conclusion, we can state that our results
are in conformity with the classical hypothesis:
the evidence presented indicates that the
consideration of differences in wage patterns
and capital costs offers little improvement over
the results reached by relating export shares to
productivity differences. On the other hand,
productivity differentials cannot give a full explanation
of export shares, so that we also have
to take account of transportation costs as
well as non-economic factors (Commonwealth
preference, trade and exchange restrictions,
good will, etc.) in order to provide a more comprehensive
explanation of international specialization.
The latter considerations fall outside
the confines of this paper, however.
24 "Wage Structures," this REVIEW, XXIX (Novembei
I947), 274-85.
5 "'Availability' and other Influences on the Commodity
Composition of Trade," Journal of Political Economy, LXIV
(April 1956), 145.
"Wages and Foreign Trade," this REVIEW, XXXVII]
(February 1956), 14-30.
27Cf., e.g., Karl Forchheimer, "The Role of Relative
Wage Differences in International Trade," Quarterly Journa,
of Economics, LXII (November I947), I-30.
s Interregional and International Trade, (Cambridge,
Mass., 1933), 572.
29 British and American Manufacturing Productivity,
Bulletin No. 49, University of Illinois, Bureau of Economic
and Business Research (Urbana, 1957), 45.
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