Leontief paradox

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Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital:labour ratio in exports than in imports.

This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory ("H-O theory").

1 Measurements
2 Responses to the paradox
3 See also
4 References

[edit] Measurements

In 1971 Robert Baldwin showed that US imports were 27% more capital-intensive than US exports in the 1962 trade data ^[1]using a measure similar to Leontief's.
In 1980 Leamer questioned Leontief's original methodology or Real exchange rate grounds, but acknowledged that the US paradox still appears in the data (for years other than 1947). ^[2]
A 1999 survey of the econometric literature by Elhanan Helpman concluded that the paradox persists, but some studies in non-US trade were instead consistent with the H-O theory.
In 2005 Kwok & Yu used an updated methodology to argue for a lower or zero paradox in US trade statistics, though the paradox is still derived in other developed nations. ^[3]

[edit] 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 labor). Many economists have dismissed the H-O theory in favor of a more Ricardian model where technological differences determine comparative advantage. These economists argue that the U.S. has an advantage in highly skilled labor more so than capital. This can be seen as viewing "capital" more broadly, to include human capital. Using this definition, the exports of the U.S. are very (human) capital-intensive, and not particularly intensive in (unskilled) labor.

Some explanations for the paradox dismiss the importance of comparative advantage as a determinant of trade. For instance, the Linder hypothesis states that demand plays a more important role than comparative advantage as a determinant of trade--with the hypothesis that countries which share similar demands will be more likely to trade. For instance, both the U.S. and Germany are developed countries with a significant demand for cars, so both have large automotive industries. Rather than one country dominating the industry with a comparative advantage, both countries trade different brands of cars between them. Similarly, New Trade Theory argues that comparative advantages can develop separately from factor endowment variation (e.g. in industrial increasing returns to scale).