Economic growth and economic development 157

Introduction to Modern Economic Growth
Trefler starts from the standard Heckscher-Ohlin model of international trade,
but allows for factor-specific productivity differences, so that capital in country j
has productivity Akj , thus a stock of capital Kj in this country is equivalent to an
effective supply of capital Akj Kj . Similarly for labor (human capital), country j
has productivity Ahj . In addition, Trefler assumes that all countries have the same
homothetic preferences and there are sufficient factor intensity differences across
goods to ensure international trade between countries to arbitrage relative price
and relative factor costs differences (or in the jargon of international trade, countries
will be in the cone of diversification). This latter assumption is important: when
all countries have the same productivities both in physical and human capital, it
leads to the celebrated factor price equalization result; all factor prices would be
equal in all countries, because the world economy is sufficiently integrated. When
there are productivity differences across countries, this assumption instead leads to
conditional factor price equalization, meaning that factor prices are equalized once
we take their different “effective” productivities into consideration.
Under these assumptions, a standard equation in international trade links the net
factor exports of each country to the abundance of that factor in the country relative
to the world as a whole. The term “net factor exports” needs some explanation.
It does not refer to actual trade in factors (such as migration of people or capital
flows). Instead trading goods is a way of trading the factors that are embodied in
that particular good. For example, a country that exports cars made with capital
and imports corn made with labor is implicitly exporting capital and importing
labor. More specifically, the net export of capital by country j, XjK is calculated
by looking at the total exports of country j and computing how much capital is
necessary to produce these and then subtracting the amount of capital necessary to
produce its total imports. For our purposes here, we do not need to get into issues
of how this is calculated (suffice it to say that as with all things empirical, the devil
is in the detail and these calculations are far from straightforward and require a
range of assumptions). Then, the absence of trading frictions across countries and

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