LEONTIEF PARADOX THEORY OF INTERNATIONAL TRADE PDF

In , Leontief conducted an empirical test of the H-O theory by applying his In other words, the country resorts to foreign trade in order to economise its. This result has come to be known as the Leontief Paradox. The HO theory generally explains the trade patterns during the post war periods, say – Leontief Paradox: Wassily Leontief: also is known for the “Leontief Paradox. In international trade: Factor endowments: the Heckscher-Ohlin theory.

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Trade theory is supposed to predict the patterns of output trade. But the factor-intensity reversal must be widespread or substantial to repudiate the H-O theory. This can be seen as viewing “capital” more broadly, to include human capital. That strengthened the H-O theory and refuted Leontief paradox.

Internatioal foreign trade and its factor content. It is true that this test is indirect, because technology differences have not so far been recognised as the basis for trade, but still the relative comparative advantages of different countries may be influenced by the research and development expenditure.

The productivity of labour in the United States is about three times that of labour in the foreign countries. However, it is the extra human capital embodied in labor in the export sector that counts here. Given such a situation, the United States cannot be regarded as a labour-abundant country.

Leontief Paradox Theory (An Overview)

A labor-abundant country with a trade surplus may export even the most capital-intensive product China today. In other words, this country resorts to foreign trade in order to economize its capital and dispose of its surplus labour rather than vice-versa.

A, the major trading partner of Canada, were relatively rtade capital- intensive than her imports. Human capital has not been taken into account in evaluating LP.

Leontief Paradox

A capital-abundant country need not export the capital-intensive good if her paradxo are strongly biased toward the capital-intensive goods. This page was last edited on 9 Novemberat But in fairness to Leontief, it must be said that the analysis of human capital became fully developed and fashionable only after the works of Schultz and Becker got published. Rather than one country dominating the industry with a comparative advantage, both countries trade different brands of cars between them.

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Thus, even this study ran counter to the H-O theory. The attempts were also made on empirical grounds to reconcile the Leontief analysis with the H-O theory.

We cannot make a statement “A labor-abundant country will export the labor-intensive product” in a three-good, three-factor world because labor-intensity is not defined. He refers to the fact that U. Assume further that when trade is balanced, the US exports good 1 and imports 2 and 3. Responses to the paradox For many economists, Leontief’s paradox undermined the validity of the Heckscher—Ohlin theorem H—O theory, which predicted that trade patterns would be based on countries’ comparative advantage in certain factors of production such as capital and labour.

While factories had been destroyed, the survivors were highly skilled workers, who were needed to export the capital-intensive goods.

The Leontief Praadox evoked a widespread response from academicians. Leontief received a Nobel Prize in Economics and is famous for his input-output analysis. However, estimates of human capital is sensitive to the interest rate chosen.

For many economists, Leontief’s paradox undermined the validity of the Heckscher—Ohlin theorem H—O theory, which predicted that trade patterns would be based on countries’ comparative advantage in certain factors of production such as capital and labor. Indian exports to internationsl US were capital-intensive. Attributing the wage gap to only human capital is unsatisfactory. Perfect competition is a hypothetical market situation virtually impossible to generalize and Ricardo assumption that different technologies across countries are a source of comparative advantage seems more realistic.

Leontief paradox

In this case, internattional average capital-labor ratio of the exports 1 and 3 can be lower than that in imports and a Leontief paradox occurs. Until convincing or more conclusive evidence becomes available in support of Leontief paradox, the H-O theory must be deemed as valid. Roughly half the countries tested show trade patterns consistent with the HO theory.

Thus Leontief paradox cannot be justified even on the basis of differences in demand or consumption pattern. Leontief himself explained the contradiction by reference to measures of labour supply. It was considered that a country will tend to export those commodities which use tradf abundant factors of production intensively and import those which use its scarce factor intensively.

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Kreinin conducted a survey of engineers and managers, and tried to test whether an average American worker is three times as tehory as a foreign worker. In Leontief repeated the test for US imports and exports which prevailed in Given the rheory abundance of the united states in the period after second world war, one would expect that U.

This still does not prove, however, that US exports had been more capital intensive than its imports that year.

Who stole the cookies from the cookie jar? But it is difficult to believe that US is poor in natural resources. They said that Japan’s place in the world was somewhere between the advanced and LDCs. Yrade Wikipedia, the free encyclopedia.

This argument tends to support Leontief paradox. Factually, these assumptions do not hold good. Using leongief definition, the exports of the United States are very human capital-intensive, and not particularly intensive in unskilled labour. These economists argue that the United States has an advantage in highly skilled labor more so than capital. This finding contradicted what H-O theory had predicted and came to be known as the Leontief Paradox. If factor prices are equalized, the definition of factor abundance makes sense, since income is the sum of factor incomes.

But still, if H-O theory was correct, its import-substitutes should be less capital-intensive than its exports. No reliable estimates of capital stock. It intetnational more likely that human capital had existed in both industries.

Swirling pointed out that the Leontief paradox involved a bias because internqtional inclusion of certain industries in case of which capital-labour ratio was low. It is now sufficiently clear that the empirical studies concerning the Leontief paradox or H-O theory, have provided conflicting conclusions.