Leontief The Paradox Does empirical evidence provide support for the H-O model? How would one go about testing the predictions of the H-O model?
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First empirical investigation of H-O model undertaken by Wassily Leontief Paper published in the Proceedings of the American Philosophical Society (1953) Since there are more than 2 countries, more than 2 inputs, and more than 2 goods in the world, how does one test the model?
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Interpret the two goods as "baskets" or "bundles" of goods e.g., let X represent the representative basket of goods that the United States exports And let Y represent the representative basket of goods that the United States imports
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A typical basket of exports might include a particular number of cars and bushels of wheat A typical basket of imports might include some steel and textiles In principle, one might measure the amount of capital and labor used in producing each of these typical baskets
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There are some complications...for example the production of cars uses steel, as well as capital and labor But Leontief invented a method to solve these problems Using U.S. data from 1947, Leontief calculated the following:
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Million $ of Exports Capital (1947 $) Labor (worker years) K/L ($ per worker-year)
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Million $ of "Imports" 3, 091,339
2,550,780
182
<
170
14, 015
18,184
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The data seemed to indicate that the U.S. was a net importer of relatively capital intensive goods This result was startling, since no one doubted that the U.S. was capital abundant relative to all other countries Moreover, no one doubted the logic of the H-O model
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Rather than saying that the evidence rejected the model, economists started referring to this result as the Leontief Paradox The model was logically tight, but there was no disputing the data...how could the two coexist? This one empirical finding spawned thousands of attempts at reconciling the theory with the evidence
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One possible explanation is that countries differ in technologies I put "imports" in quotes...in fact, these were "import substitutes" or "importcompeting goods"
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That is, suppose the U.S. imports fabric from India. We can calculate the capital and labor content of similar fabric produced in the United but States, that may be different than the capital and labor content of Indian production The U.S. might use a relatively capitalintensive production process, while India may use a relatively labor-intensive process
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Perhaps the existence of additional inputs can explain the paradox Suppose we think of natural resources as a separate input. Perhaps the U.S. is really importing goods intensive in the use of natural resources, and it just so happens that these goods are also intensive in the use of capital
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Perhaps not all labor is alike
Perhaps the U.S. tends to import goods intensive in the use of unskilled labor, while exporting goods intensive in the use of skilled labor
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Perhaps Leontief's results were not interpreted properly Edward Leamer pointed out in an article published in 1980 that the H-O model relates the factor content of production, trade, and consumption in a very specific way
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Using a carefully-reasoned mathematical argument, Leamer showed that if a country had a trade surplus (as did the United States in the late 1940s) and was a net exporter of both capital and labor services, that country would be revealed capital abundant if
net exports of capital capital embodied in consumption > net exports of labor labor embodied in consumption
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Using Leontief's own data on the factor content of trade, combined with independent data on the factor content of consumption, Leamer showed that this inequality was satisfied...the U.S. was revealed capital abundant
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Some clarifying comments "Net exports of capital" means that we measure the amount of capital used to produce exported goods and subtract from that the amount of capital used to produce imported goods A similar meaning for "net exports of labor" follows
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We do not mean that capital and labor themselves are being traded Similarly, capital and labor "embodied in consumption" refers to the amount of capital and labor used to produce the typical basket of consumption goods
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The consensus is that the evidence seems to support the notion that the pattern of trade is heavily dependent upon inter country differences in factor endowments, but the most basic version of the H-O model is too simple to fully explain trade patterns
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