Factor Uses and the Pattern of Specialization

We show that in the setting of multiple goods and factors, the factor proportions theory has the following prediction: <i>across industries</i>, the impacts of the endowment of a given factor on industry outputs have positive co-variance with the relative uses of this factor. The intuition is that, on average, the industries that use a given factor heavily have positive output responses, following an increase in the endowment of this factor. This co-variation condition is robust to Hicks neutral- and factor-augmenting productivity differences, and constitutes a direct test of the production side of the factor proportions theory. We also show that the co-variation condition finds empirical support. This is evidence that is consistent with the factor proportions theory. Copyright © 2008 The Authors.