By general approval, the United States is the only country that is most abundantly capable of capital. Therefore, one would expect the United States to export assets thorough goods and import labor demanding goods. Generally, most economists believe that the world would gain more when countries trade with each other.

  1. The value of output derived from a given stock of materials and human resources increases on account of research and development activity.
  2. Theory of comparative advantage should perhaps not primarily be viewed as geared toward empirical testing.
  3. According to Buchanan, Leontief made use of investment requirement co-efficient as the capital co-efficients.
  4. There is no doubt that the productivity of labour is higher in the United States than in other countries.
  5. There is little doubt that the United States is most well-endowed with human capital.

In a study conducted by Kreinin in 1965, it was revealed that the productivity of American labour was more than that of the foreign labour only by 20 to 25 percent and not by 300 percent. L. Tarshis approached the whole problem indirectly by comparing the internal commodity prices in different countries. The study revealed that the price ratio of capital-intensive relative to labour- intensive goods was lower in the United States and higher in other countries. Since the United States is a relatively capital-abundant country, the result is fully consistent with Heckscher-Ohlin theory. Another study that provided support to the Leontief paradox was made by R. He showed that Indian exports, in general, were more labour- intensive, while imports were capital-intensive.

Many other economists too attempted to reconcile the Leontief paradox with the H-O theory of international trade. Almost 75 percent of her trade was with the countries of the communist block. At the same time, her exports to these countries were relatively capital- intensive and imports labour-intensive. Table 8.1, shows that import replacement industries in the U.S. had been employing 30 percent more of capital than the export industries. The capital-labour ratio was higher in the import- replacement industries than the export industries. It suggested that the exports of United States, generally recognised as the capital-abundant country, were labour-intensive.

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Notably, Leontief’s Paradox does not account for human capital and the resulting difference between skilled and unskilled labor. Later researchers showed that U.S. exports were skilled-labor-intensive—or, in other words, human capital intensive relative to imports—resolving the Leontief Paradox in favor of the comparative advantage view. Based on input-output analysis of international trade he discovered that the U.S., a country with a great deal of capital, was importing capital-intensive commodities and exporting labor-intensive commodities. This is in contrast to prior theories of international trade, which predict that countries will specialize in and export goods that they have a comparative advantage in producing.

Trade theories

Leontief’s input-output analysis has been used by the World Bank, the United Nations, and the U.S. Leontief’s paradox occurs when a capital-intensive country imports a capital-intensive commodity from another country. A serious weakness in Leontief’s analysis was that he failed to take into account the effect of tariffs policy on the pattern of trade. Travis emphasized that the tariff policies adopted by different trading countries often distorted the pattern and composition of traded commodities. Leontief’s results too were seriously affected by tariff policies in the United States and her trading partners but Leontief overlooked this influence. Learner expressed the view that Leontief paradox would fail when the country had trade imbalance.

Such an investment brings about substantial increase in the productivity of labour. There is little doubt that the United States is most well-endowed with human capital. If the human capital component is added to the physical capital, the U.S. exports become far more capital-intensive relative to her import- substitutes. It is confirmed by the empirical studies conducted by Kravis (1956), Kenen (1965) and Keesing (1966).

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He developed input-output tables for sector analysis that estimated the impact a change in production of a good has on other industries and their inputs—establishing the interdependent relationships of economic sectors. In addition, the increase in labour efficiency or productivity to the stated extent implies that productivity of capital should also be three times more than that in the foreign country. The multiplication of capital stock with a multiple of three would leave the factor endowments unchanged and Leontief’s logic would fall through. Leontief attempted to defend his conclusion by putting forward the argument that the productivity of an average American worker was equivalent to three foreign workers.

Analysts can use input-output analysis to estimate the impacts of positive and negative economic shocks by showing the changing demand for inputs when the production of outputs changes. This helps to analyze ripple effects throughout an economy as changes in demand for final goods work their way up the supply chain. Input-output tables can produce very rough estimates for small or moderate changes in outputs, but because they assume fixed production technology they cannot accurately account for the dynamics of a real economy.

Composite Commodity Theorem

The Composite Commodity Theorem was a third major development credited to Leontief, who fathered the concept with John Hicks. This states that if the relative prices of a basket of goods are assumed to be fixed, then they can be treated as a single composite good for the purpose of mathematical modeling. To save content items to your account,
please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Leontief paradox has been subjected to criticism both on the methodological and empirical grounds. The Leontief paradox is a mathematical puzzle of how to allocate resources.

To that end, Wassily Leontief did much to make quantitative data more accessible, and more indispensable, to the study of economics. The one he gave priority ran in terms of differences in labour productivity. Leontief argued that American labour could not really be compared to labour in other countries, because the productivity of an American worker is substantially higher what is leontief paradox (three times higher, suggested Leontief) than that of foreign workers. Throughout his professional life, Leontief promoted the use of quantitative data in economics. Leontief campaigned for broader and deeper developments in the area of quantitative data analysis throughout his career. He was also one of the first economists to use a computer for quantitative research.

This would be one way, according to Leontief, by which his findings could be reconciled with the 11.0 theorem. Most economists might acknowledge the superior quality of U.S. labour. Kravis indicating that wages are higher in U.S. export industries than in its import competing industries as supporting evidence.

Hence, managers need to be familiar with several theories that attempt to explain how and why trading is beneficial so that businesses can make the most out of it. However, Leontief was surprised to discover that US imports were 30% more capital-intensive than US exports. The argument of the Leontief paradox has barely been competent to ascertain firm conclusions. It has provided a good deal of imminent into the international trade situation of the U.S., but it has almost not helped to ascertain or disprove the H.O.

Romney Robinson explained Leontief paradox without repudiating the Heckscher-Ohlin theory on the basis of relative patterns of demand existing in the United States and other countries. In view of this, it is not surprising that the labour- abundant United States exports those products, which have relatively greater labour-intensity. There is no doubt that the productivity of labour is higher in the United States than in other countries. But the multiple of three, as assumed by Leontief was clearly arbitrary.

This means that a capital rich country, such as the U.S., would be expected to export capital-intensive goods and import labor-intensive goods from countries where labor is comparatively cheaper. Buchanan has criticized Leontief for having neglected the role of natural resources in the determination of trade pattern. Capital and natural resources are complementary in many fields of production. Although capital is relatively abundant in the United States, yet it may be less effective because that country is relatively under-supplied with natural resources and it may not be able to make full use of its capital. Larger agricultural exports from Canada, Australia and most of the less developed countries are land-intensive essentially because of an abundance of land.

The Loentief paradox brought into focus the crucial issue of the validity or otherwise of H-O theory. Many economists conducted Loentief type studies related to other countries. While some of the empirical studies put a question mark on the validity of H-O theory, the others have gone in favour of it. The conclusion derived by Leontief not only surprised himself but startled the academicians throughout the world. The economists undertook intense research for re-examining both the H-O theory and Leontief paradox.

Using 1947 US input–output tables and data on exports and imports, Leontief (1953) found, to the surprise of the profession, that the capital per worker of US exports was less than the capital per worker of US import substitutes. The response to this empirical ‘paradox’ was the formulation of theory that might explain why a capital abundant country had labour-intensive exports. These were the first (confused) steps in an ongoing process of making the theory and data conform sufficiently to enable us comfortably to claim to understand the basis for international trade. The Heckscher–Ohlin–Samuelson model of international trade with two factors of production and two commodities implies that a country will export the commodity that is produced intensively with the relatively abundant factor. This seemed to conflict sharply with the presupposition that the US was abundant in capital compared with labour.