Cones of diversification in a model of international comparative advantage

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The hypothesis that all countries belong to a single cone of diversification is often used in studies of international trade. However, contrary to this hypothesis, the range of capital–labour input ratios in US industries does not encompass the range of capital– labour endowment ratios in the world’s economies. Furthermore, among countries with capital–labour endowment ratios below the range of US capital–labour input ratios, wage rates are much lower than in the US. In this paper, the one-cone hypothesis is assessed relative to a two-cone alternative by clustering countries with similar factor proportions, estimating regressions for gross national product and net exports, testing for equality of coefficients, and approximating the posterior odds on one- and two-cone models. Rejecting the one-cone hypothesis, the paper presents estimates of a two-cone model and considers their implications for factor flows and the prospects of emerging market economies. © 2000 Taylor & Francis Ltd.

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Journal of International Trade and Economic Development