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Class11_Leontief

Class11_Leontief - Faith or Facts Leontief's Paradox...

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Heckscher-Ohlin Model When trade opens: The relative price of computers in Home rises from the no-trade price. This gives Home an incentive to produce more computers and export the difference. The relative price of computers in Foreign falls from the no-trade price. This gives Foreign an incentive to produce fewer computers and import the difference. This also means the relative price of shoes in Foreign arises giving Foreign the incentive to increase production and export the difference This may all seem obvious in the H-O context Let s test it
Heckscher-Ohlin Model Testing the Heckscher-Ohlin Theorem: Leontief s Paradox Wassily Leontief performed the first test of the HO theorem in 1953 using data for the U.S. from 1947. He measured the amounts of labor and capital used in all industries needed to produce \$1 million of U.S. imports and to produce \$1 million of imports into the U.S. These data are in Table 4.1 which also shows the capital/labor ratio in dollars per person.

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Heckscher-Ohlin Model Leontief s Test
Heckscher-Ohlin Model The capital/labor ratio was \$14,000 Each person employed was working with \$14,000 worth of capital. Leontief used labor and capital for the production of final good exports in each industry. But he also measured the labor and capital used indirectly in the industries that produced the intermediate inputs used in making exports.

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Heckscher-Ohlin Model It was impossible for Leontief to get information on the amount of labor and capital used to produce imports. He used data on U.S. technology to estimate amounts of labor and capital used in imports. Remember the HO model assume technologies are the same across countries. This gave a capital/labor ratio of \$18,200 per worker. This exceeds the ratio for exports.
Heckscher-Ohlin Model Leontief assumed correctly that in 1947 the U.S. was capital abundant relative to the rest of the world. From the HO model, Leontief expected that the U.S. would export capital intensive goods and import labor intensive goods. Leontief, however, found the opposite. The capital labor ratio for U.S. imports was higher than for exports. This contradiction came to be called Leontief s paradox.

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Heckscher-Ohlin Model Why would this paradox exist?
Heckscher-Ohlin Model Why would this paradox exist? U.S. and foreign technologies are not the same as assumed. By focusing only on labor and capital, land abundance in the U.S. was ignored. No distinction between skilled and unskilled labor. The data for 1947 could be unusual due to the recent end of WWII. The U.S. was not engaged in completely free trade as is assumed by the HO model.

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Heckscher-Ohlin Model Several of the explanations depend on having more than two factors of production.
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Class11_Leontief - Faith or Facts Leontief's Paradox...

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