Inspired by Leontief, Trefler has argued that the observed variation in wages and rental rates to capital is due to differences in the quality or amount of services that these factors deliver and not to differences in the prices of their services. This is the Leontief-Trefler hypothesis. Trefler found that there is very little factor content in existing trade flows. This is the case of the missing trade. These two findings have very important implications for the theories of international trade and economic growth.
The objective of this research is to design and execute an alternative an independent test of the Leontief-Trefler hypothesis. The original test of the Leontief--Trefler hypothesis has very low power against reasonable alternatives. A new test is proposed that exploits the intuitive idea that the price of labor-intensive products should be high relative to that of capital-intensive prod-ucts if the price of labor services is high relative to that of capital services. In fact, the main insight of this method consists of using product-price gra-dients, i.e. the slope of the relationship between (log) prices and labor shares in costs, to estimate productivity-adjusted wage-rental ratios. This insight is quite general, and its implementation does not require assumptions on how technology and expenditure patterns vary across countries or what are the costs of international trade and factor movements.
