8. Factor Endowments and the Pattern of Commodity and Factor Trade

In the traditional theory of international trade, it is customary to assume that the factors of production are prohibited from moving from country to country for some reason or another. This assumption of factor immobility has an important function, especially in the theory of comparative advantage. The standard Heckscher–Ohlin theory explains the pattern of commodity trade in terms of factor endowment proportions of different countries on the assumption that no factors of production are internationally mobile (for an excellent recapitulation and generalization of the doctrine, see Dixit and Woodland 1982). In reality, however, some factors are known to move across national borders, as exemplified by the international transfer of entrepreneurial resources and labor services (often through direct investment), as well as by international capital movements.