Leontief paradox

Leontief Paradox

Chiara Thiele & Ria Leandra Riediger19 IMB - International Economics 19/01/2021

Index

1. Introduction2.Main Part 2.1 Revision Heckscher - Ohlin theorem2.2 Leontief Paradox2.3 Explanation 2.4 Factor Endowments 2.5 Differing productivities 3. Conclusion

Chiara Thiele & Ria Riediger 19 IMB - International Economics

Introduction

Revision of Heckscher - Ohlin theorem

Chiara Thiele & Ria Riediger 19 IMB - International Economics

Revision of Heckscher - Ohlin theorem

The economist Wassily Leontief tested in 1953, as the first, the Heckscher - Ohlin theorem using data for the USA from 1947.

Heckscher -Ohlin theorem

Revision

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

Heckscher - Ohlin theorem

predicts that with two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good.

Free Trade which will lead to the equalisation of prices.

Assumptions

• two products, two factors of prodcution
• Labor and Capital flow freely
• same technologies across countries
• perfect competition in all markets
• different tastes
• cars = capital intensive, clothes = labor intensive

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

1 Sturm: International Economics, slide 69

Leontief Paradox

Leontief measured the amounts of labor and capital used in all industries needed to produce $1million of U.S exports and $1million U.S imports.

• Leontief assumed USA in 1947 to be abundant in capital relative to the rest of the world

U.S. Imports

U.S. Exports

3,1

2,55

Capital ($millions)

ratio, we find that each person employed in producing imports was working with 18,200 worth of capital

ratio, we find that each person employed in producing exports was working with 14,000 worth of capital

Labor (persons -years)

170

182

14,000

18,200

Capital/Labor

Leontief actually found the opposite: capital-labor ratio for imports were higher than for exports.

= Contradiction of the Heckscher-Ohlin theorem

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

1 Feenstra & Taylor: International Economics (16.11.2020)

Possible explanation

• technologies were different across countries

• Leontief ignored the land abundance of the USA 1947

• should have distinguished between low and high skilled labor

• Data may be unusual due to the previous World War II

• USA was not engaged in completely free trade

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

1 Feenstra & Taylor: International Economics (16.11.2020)

Factor Endowment in 2013

Factor endowments in 2013

Research in later years aimed to redo the test that leontief performed, while taking into account land, high-skilled versus low-skilled labor, checking whether the Hesckscher-Ohlin theorem holds on in other years, and so on.

Endowment in per cent

To determine whether a country is abundant in a certain factor, we compare the country’s share of that factor with its shares of world GDP its share of a factor > share of world GDP = country is abundant in that factor its share of a factor < share of world GDP = country is scarce in that factor

Country factor

1 Feenstra & Taylor: International Economics (16.11.2020)

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

Differing productivities across countires

How to introduce differing productivities in Heckscher-Ohlin theorem?

Leontief himself suggested to abandon the assumption that technologies are the same across countries and instead allow differing productivities

Discussion of factor endowments in 2013 shows that it is possible for countries to be abundant in more than one factor of production and sometimes it is important to correct that actual amount of a factor of production for its productivity, obtaining the effective factor endowment

1 Feenstra & Taylor: International Economics (16.11.2020)

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

How to introduce differing productivities in Heckscher-ohlin model?

Effective factor endowment = Actual factor endowment x factor productivity

share of an efficient factor > its share of world GDP = abundant in that effective factor share of an efficient factor < its share of world GDP = scarce in that efficient factor

1 Feenstra & Taylor: International Economics (16.11.2020)

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

- author name

Endowment in per cent

Endowment in per cent

Country factor

Country factor

Endowment in per cent

Country factor

Effective R&D scientists = Actual R&D scientists x R&D spending per scientist

Effective arable land = Actual arable land x Productivity in agriculture

Effective amount of labor = Actual amount of labor x wage

1 Feenstra & Taylor: International Economics (16.11.2020)

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

Conclusion

Leontief Paradox 1947 capital labor ratio US exports < capital - labor ratio US imports

Reason & Result:

Leontiefs Expectations & Results:

• USA is abundant in capital compared to the rest of the world
• will export capital intensive good
• has a larger capital/labor ratio in export than foreign has on its import

• USA was abundant in both capital and skilled labor

(once we correct the productivity by using its wage)

Leontief proved the opposite - Contradiction of HO - theorem

take into account differences in the productivity of factors across countries, there is NO PARADOX AFTER ALL

Chiara Thiele & Ria Riediger - 19 IMB - International Economics

Thank you!

Chiara Thiele & Ria Leandra Riediger19 IMB - International Economics 19/01/2021