International Factor Price Differences: Leontief was Right!

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Abstract
The factor price equalization hypothesis is widely at odds with the large variation in factor prices across countries. Similarly, the Heckscher-Ohlin-Vanek (HOV) theorem constitutes an incomplete description of trade in factor services: its predictions are always re- jected empirically. These two issues are examined using a modifica- tion of the HOV model that allows for factor-augmenting interna- tional productivity differences. The empirical results are stark: this simple modification of the HOV theorem explains much of the fac- tor content of trade and the cross-country variation in factor prices.

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