the leontief paradox
What is Leontief Paradox Trade Theory
By Deepti Verma
W. W. Leontief received a Nobel Prize in Economics 1973 and is famous for his input-output analysis. The US is widely recognised to be a capital-abundant country.
Therefore, in terms of H-O theory, it is expected that the US would export capital-intensive goods and import labour-intensive ones. In 1951, Leontief conducted an empirical test of the H-O theory by applying his input- output technique on American trade data of 1947.
He estimated factor-intensity of a “representative bundle” of US exports and US import-substitutes. Leontief found that import substitutes of the US were more capital-intensive than its exports. This finding contradicted what H-O theory had predicted and came to be known as the Leontief Paradox.
In Leontief’s own words, “America’s participation in division of labour in international trade is based on its specialisation in labour-intensive rather than capital-intensive lines of production. In other words, the country resorts to foreign trade in order to economise its capital and dispose of its surplus labour, rather than vice versa”.
Resolving the Paradox:
The Leontief Paradox evoked a widespread response from academicians. Several attempts were made by them to either defend the paradox or discover its logical flaws and prove it wrong.
Labour Productivity:
Leontief himself made an attempt to resolve this paradox by claiming that US labour was far more productive than that of the countries from which US got its imports. As such, if input of US labour was adjusted (that is, multiplied) by a factor of three, US would be ranked as a labour-abundant country.
However, this claim of Leontief was not widely accepted. His critics maintained that the paradox could not be resolved in this manner. This is because in 1947, US labour and capital were both more productive than was the case in other countries and, therefore, US was still to be rated as a highly capital-abundant
By Deepti Verma
W. W. Leontief received a Nobel Prize in Economics 1973 and is famous for his input-output analysis. The US is widely recognised to be a capital-abundant country.
Therefore, in terms of H-O theory, it is expected that the US would export capital-intensive goods and import labour-intensive ones. In 1951, Leontief conducted an empirical test of the H-O theory by applying his input- output technique on American trade data of 1947.
He estimated factor-intensity of a “representative bundle” of US exports and US import-substitutes. Leontief found that import substitutes of the US were more capital-intensive than its exports. This finding contradicted what H-O theory had predicted and came to be known as the Leontief Paradox.
In Leontief’s own words, “America’s participation in division of labour in international trade is based on its specialisation in labour-intensive rather than capital-intensive lines of production. In other words, the country resorts to foreign trade in order to economise its capital and dispose of its surplus labour, rather than vice versa”.
Resolving the Paradox:
The Leontief Paradox evoked a widespread response from academicians. Several attempts were made by them to either defend the paradox or discover its logical flaws and prove it wrong.
Labour Productivity:
Leontief himself made an attempt to resolve this paradox by claiming that US labour was far more productive than that of the countries from which US got its imports. As such, if input of US labour was adjusted (that is, multiplied) by a factor of three, US would be ranked as a labour-abundant country.
However, this claim of Leontief was not widely accepted. His critics maintained that the paradox could not be resolved in this manner. This is because in 1947, US labour and capital were both more productive than was the case in other countries and, therefore, US was still to be rated as a highly capital-abundant