Economics Dictionary of ArgumentsHome
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| Leontief Paradox: The Leontief Paradox is an empirical finding by Wassily Leontief that contradicted the Heckscher-Ohlin theorem. Leontief found that the United States, a capital-abundant country, surprisingly exported goods that were more labor-intensive and imported goods that were more capital-intensive. This challenged the idea that countries export what they are abundant in and import what they are scarce in. See also Heckscher-Ohlin theorem, Heckscher-Ohlin model, International trade._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert C. Feenstra on Leontief Paradox - Dictionary of Arguments
Feenstra I 2-7 Leontief paradox/Feenstra: Leontief (1953)(1) was the first to confront the Heckscher-Ohlin model (HO) with data. >Heckscher-Ohlin model. LeontiefVsHeckscher-Ohlin: [Leontief] had developed the set of input-output accounts for the U.S. economy, which allowed him to compute the amounts of labor and capital used in each industry for 1947. In addition, he utilized U.S. trade data for the same year to compute the amounts of labor and capital used in the production of $1million of U.S. exports and imports. Feenstra I 2-8 Leontief first measured the amount of capital and labor required for $1 million worth of U.S. exports. This calculation requires that we measure the labor and capital used directly, i.e. in each exporting industry, and also these factors used indirectly, i.e. in the industries that produce intermediate inputs that are used in producing exports. (…) we see* that $2.5 million worth of capital was used in $1 million of exports. This amount of capital seems much too high, until we recognize that what is being measured is the capital stock, so that only the annual depreciation on this stock is actually used. For labor, 182 person-years was used to produce the exports. Taking the ratio of these, we find that each person employed in producing exports (directly or indirectly) is working with $13,700 worth of capital. Turning to the import side of the calculation, we immediately run into a problem: it is not possible to measure the amount of labor and capital used in producing imports unless we have knowledge of the foreign technologies, which Leontief certainly did not know in 1953! Indeed, it is only very recently that researchers have begun to use data on foreign technologies to test the HO (Heckscher-Ohlin) model (…). So Leontief did what many researchers have done since: he simply used the U.S. technology to calculate the amount of labor and capital used in imports. Does this invalidate the test of the HO model? Not really, because recall that an assumption of the HO model is that technologies are the same across countries. Thus, under the null hypothesis that the HO model is true, it would be valid to use the U.S. technology to measure the labor and capital used in imports. If we find that this null hypothesis is rejected, then one explanation would be that the assumption of identical technologies is false. Leontief paradox: (…) $3.1 million of capital, 170 person-years, and so a capital/labor ratio in imports of $18,200. Remarkably, this is higher than the capital/labor ratio found for U.S. exports! Feenstra I 2-9 Under the presumption that the U.S. was capital-abundant in 1956, this appears to contradict the HO Theorem. Thus, this finding came to be called “Leontief’s Paradox.” A wide range of explanations have been offered for this paradox: VsLeontief/VsLeontief paradox: • U.S. and foreign technologies are not the same; • By focusing only on labor and capital, Leontief ignored land; • Labor should have been disaggregated by skill (since it would not be surprising to find that U.S. exports are intensive in skilled labor); • The data for 1947 may by unusual, since World War II had just ended; • The U.S. was not engaged in free trade, as the HO model assumes. These reasons are all quite valid criticisms of the test that Leontief performed, and research in the years following his test aimed to re-do the analysis while taking into account land, skilled versus unskilled labor, checking other years, etc. This research is well summarized by Deardorff (1984a)(3), and the general conclusion is that the paradox continued to occur in some cases. It was not until two decades later, however, that Leamer (1980)(4) provided the definitive critique of the Leontief paradox: it turned out that Leontief had performed the wrong test! That is, even if the HO model is true, it turns out the capital/labor ratios in export and imports, as reported in Table 2.1,* should not be compared. Instead, an alternative test should be performed. The test that Leamer proposed relies on the “factor content” version of the Heckscher-Ohlin model, developed by Vanek (1968)(5), (…). >Heckscher-Ohlin model. Feenstra I 2-17 Baldwin: (…) looking across the U.S. industries, Baldwin(6) finds that those industries using more scientist, craftsmen and foremen, or farmers relative to total workers, will tend to have higher exports. The importance of scientists and farmers in predicting U.S. exports is not surprising at all, since the U.S. is abundant in skilled–labor and land; and the importance of craftsmen and foremen is perhaps reasonable, too. What is surprising, however, is the negative coefficient found on the very first variable, physical capital/worker. Taken literally, this coefficient says that U.S. industries using more capital/worker will tend to export less. Feenstra I 2-18 This is exactly the opposite of what we would expect if the U.S. were capital-abundant. Thus, this result appears to be similar to the “paradox” found by Leontief. Various writers after Baldwin have redone the type of regression shown above, with mixed results: sometimes the capital coefficient is positive, but other times it is again negative (see the survey by Deardorff, 1984a)(3). Feenstra: (…) even if the U.S. was capital-abundant and the HOV Theorem held, it would still be possible for the Baldwin regression to find a negative coefficient on capital: this does not contradict the HOV Theorem, because like the original Leontief approach, it is the wrong test. * For the tables see Feenstra 2002(2). 1. Leontief, Wassily, W., 1953, Domestic Production and Foreign Trade: The American Capital Position Re-examined,” Proceedings of the American Philosophical Society, 97, September, 332-349. Reprinted in Readings in International Economics, edited by Richard Caves and Harry. G. Johnson, Homewood, IL: Irwin, 1968. 2. Robert C. Feenstra. 2002. Advanced International Trade. University of California, Davis and National Bureau of Economic Research August 2002. 3. Deardorff, Alan V., 1984a, “Testing Trade Theories and Predicting Trade Flows,” in Ronald Jones and Peter Kenen (eds.), Handbook of International Economics, vol. 1. Amsterdam, New York: North Holland, 467-517. 4. Leamer, Edward E., 1980, “The Leontief Paradox, Reconsidered,” Journal of Political Economy, 88(3), 495-503. Reprinted in Edward E. Leamer, ed. 2001, International Economics, New York: Worth Publishers, 142-149. 5. Vanek, Jaroslav, 1968, “The Factor Proportions Theory: The N-Factor Case,” Kyklos, 21, October, 749-754. 6. Baldwin, Robert E., 1971, “Determinants of the Commodity Structure of U.S. Trade,” American Economic Review, March, 61, 126-146._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Feenstra I Robert C. Feenstra Advanced International Trade University of California, Davis and National Bureau of Economic Research 2002 |
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> Counter arguments against Feenstra
> Counter arguments in relation to Leontief Paradox
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