Factor Prices and International Trade: A Unifying Perspective

How do trade liberalizations a¤ect relative factor prices and to what extent do they cause factors to reallocate across sectors? We …rst present a general accounting framework that nests a wide range of models that have been used to study the link between globalization and factor prices and from which we obtain two su¢ cient statistics that determine factor prices. Under some restrictions, changes in the "factor content of trade" (FCT) fully determine the impact of trade on relative factor prices. We then study the determination of the FCT in a speci…c version of our general framework that uni…es traditional models of trade and factor prices featuring sectoral productivity and factor endowment di¤erences and new models featuring imperfect competition and heterogeneous producers. We show how heterogeneous …rms’decisions shape the FCT, and, therefore, the impact of trade liberalization on relative factor prices and between-sector factor allocation. We thank Arnaud Costinot, Javier Cravino, Gene Grossman, Stephen Redding, and Andrés RodríguezClare for very useful comments and the National Science Foundation (under Grant SES-0962261) for research support. A previous version of this paper circulated under the name “International Trade Patterns, the Skill Premium, and Heterogeneous Firms.”