Abstract
   
 

This paper defines a new measure of economic distance. Using consistent cross-country data, we estimate local unit costs for 35 sectors in 40 countries. The distance between two countries is the largest percentage difference in unit costs among all sectors. If all goods are traded, this distance is the smallest uniform ad valorem tariff that shuts down bilateral trade. The network induced by the closest 10% of these distances has one large component, consisting primarily of the advanced industrial economies. China, India, and several other countries are isolated components, indicating that their unit costs are idiosyncratic. We also introduce a new measure of revealed comparative advantage.

   
 

Measuring factors services, not quantities, we examine the technologies and endowments of thirty-nine countries and five factors in 2005. We conduct three tests of the Heckscher-Ohlin-Vanek paradigm: (1) the conventional one; (2) a benchmark where every country has America’s technology; and (3) a test that converts foreign endowments into international efficiency units. The first predicts the direction of trade better than any former study. The second shows no statistically significant evidence of missing trade. The third performs just as well, and it accounts for international differences in both factor prices and unit input requirements.

   

We use recent international data on cost shares by sector to conduct the first robust test of Leontief's hypothesis of factor-specific productivity differences. We strongly reject this hypothesis. Hence tests of the Heckscher-Ohlin-Vanek paradigm cannot be based upon simple modifications that define factors in efficiency units. We also discuss a theory of productivity differences that describes the factor content of trade well.

   
 

International economists have traditionally measured factor uses from one source and intermediate inputs from another, introducing measurement error into technology matrices. This inaccuracy is compounded when countries have different factor prices, since it is no longer appropriate to measure factors in homogeneous physical units. It is better to compute the direct and indirect flows of local factor services per unit of output. Adhering to macroeconomic accounting conventions and using consistent data, I compute cost shares in forty-eight industries in thirty-three countries. Since capital and labor are typically complementary inputs, a country that is physically scarce in a factor may well be abundant in its services.