Leontief paradox

The Leontief paradox is the result of an empirical study in the field of international trade in goods, which was published in 1954 by Wassily Leontief and which completely contradicts the previously undisputed Heckscher-Ohlin theorem (factor proportion theorem). The Leontief paradox triggered a large number of empirical follow-up studies on the contradiction between empiricism and theory .

Topic overview

The Leontief theorem, which, besides the Heckscher-Ohlin theorem, deals with the reasons for international trade in the recording and the direction of movement, is one of the most important explanations for this. On the one hand because it is in great contradiction to the Heckscher-Ohlin theorem and on the other hand because it is the first analysis based on an input-output table . This input-output table was developed by Leontief himself and will be explained later in the text. After its publication in 1947, numerous and intense debates about the reasons and contradictions between the two theorems followed. It is for this reason that the name “Paradox” came about. Which resulted in numerous further developments of the models of factor proportion theory.

Historical introduction

As a nation, the USA occupies a special position in the economy. One reason for this is that they are far more affluent than other countries and that the per capita income of workers is significantly higher than that of other countries. The United States is one of the countries with the highest capital intensities (capital-labor ratio). According to the Heckscher-Ohlin theorem, this suggests that the US exports capital-intensive goods and imports labor-intensive goods. Surprisingly, however, this assumption was wrong up to 25 years after World War II . This was recognized by Leontief in 1953 and to this day represents the strongest individual evidence against the Heckscher-Ohlin theorem.

Heckscher-Ohlin theorem

Leontief dealt with the Heckscher-Ohlin theorem, a neoclassical model which was undisputed in foreign trade theory until after the Second World War . According to this theorem, the cause for the direction and extent of foreign trade is the different endowment with production factors in the individual countries. A country that - in comparison to other countries - is well equipped with a certain production factor will make greater use of it. This means that it can produce relatively cheaper than abroad. According to the Heckscher-Ohlin theorem, countries involved in international trade will specialize in exporting goods whose production factor is very much present in their own country in relation to other countries. The exported goods are then cheaper than abroad.

Leontief's study of the economic structure of the USA

In an extensive empirical study of the US economic structure in 1947, Wassily Leontief found that the relatively well-capitalized United States imported relatively capital-intensive goods and exported relatively labor-intensive goods from the rest of the world. The finding of the study published in 1953 that US exports were less capital-intensive than imports completely contradicted the previously undisputed Heckscher-Ohlin theorem and therefore became known as the Leontief Paradox.

Factor content of US exports and imports in 1962

	Imports	Exports
Capital per million dollars	$ 2,132,000	$ 1,876,000
Labor (person-years) per million dollars	119	131
Capital intensity school and training time per worker (years)	$ 17,916	$ 14,321
Share of engineers and scientists in production (%)	0.0189	0.0255

The 1962 US trade structure table compares the factors required to produce export goods with those required to produce imported goods, each worth a million dollars. The first two lines of the table show that this year too the import / export ratio - as previously described by Leontief - contradicted the Heckscher-Ohlin theorem.

The production of American export goods shows a higher intensity of skilled labor than that of the import of substitute goods and a lower capital investment. That is, the capital intensity of US export goods was lower than that of imported goods. In addition, technology-intensive goods were produced in the export sector, the manufacture of which involved a higher number of scientists and engineers per unit of turnover. Thus the United States of America has become a nation abundantly endowed with highly skilled labor and with a comparative advantage in complex products.

Methods and results

To determine his results, Leontief developed an input-output model that referred to the year 1947 and took into account almost 200 sectors in order to determine the average capital intensity of exports from the USA. The input-output table shows particularly well the direction of real goods movements by showing the purchase and delivery flows that flow between the various economic sectors of a country and abroad. Since no US data was available on products that were actually imported but not manufactured in the US, such as coffee, tea and rice, these were not included in the investigation. Therefore he compared the capital intensity of American exports with the capital intensity of American industries that competed with American imports (competing import goods).

Input-output table from Leontief, 1947

If you multiply the proportional values ​​of the individual export and import competing goods by the respective labor and capital coefficients, you get the factor quantities that were required for production. Adding export and competing import goods results in the total amount of capital and labor that must be used to produce these bundles of goods, each worth 1 million US dollars. The comparison between capital and labor expenditure in export and the competitive import sector provides a statement about the relative factor intensity of the two sectors.

The result was that the US exported "labor" and imported "capital". The capital intensity of the competitive import sector was higher than that of the export sector. The USA exported relatively labor-intensive goods. The total labor input for the production of American export goods was greater than that of the imported goods. It turned out that competing imports from the USA require 30% more capital per unit of work to produce them than exports of the same value. Similar analyzes carried out later for Japan, Canada and also the FRG came to similarly paradoxical results in comparison to the results to be expected from the Heckscher-Ohlin theorem.

Reason for the Leontief paradox

There are the following reasons for the differences between the empirical studies by Wassily Leontief and the Heckscher-Ohlin theorem:

• The production technologies are not the same :
  there are not only differences in the factor endowment, there are also considerable relative differences in the factor productivities.
• The factors of production are not homogeneous :
  industrialized countries such as the USA are relatively well equipped with highly skilled work. That is why they export goods whose production requires a relatively large amount of this factor. This led to the neo-factor proportion theory.
• Natural resources are in addition to the factors of labor and capital used to :
  The use of natural resources, a high proportion is bound to capital. As a result, goods produced in a comparable manner are often also imported.
• The demand preferences are not the same :
  The countries that are active in international trade have different demand preferences, for example American industry is particularly in search of capital-intensive goods.
• The factor intensities can vary depending on the production volume :
  There is no clear connection between the relative factor price and the relative goods price.
• Measures of protectionism :
  During the period of the empirical investigation by Wassily Leontief, changes were made to customs policy measures in the USA. These included, for example, the protection of production sectors with relatively high labor intensity .

criticism

• The main point of criticism is the labor factor, but this is not homogeneous, i. H. Workers have different qualifications and are therefore not comparable.
• The investigation was limited to only two factors (capital, labor), so there were no factors to consider such as B. Market system, competition order, technological knowledge, customs policy and land.
• The influence of scarce natural resources could lead to a fundamental change in the results. The variances in capital and labor intensities between exports and import substitutes could determine what is imported due to the scarcity of important natural resources. For example, the USA exports a lot of goods, which require abundant factors (capital, labor). But importing goods and goods that use a lot of the scarce natural resources.
• Imputed identity between imports and import substitutes.
• Different production technologies, which prevailed in research and development due to the different status of the countries (among other things as a result of the Second World War), were not taken into account.
• Different factor intensities of the traded goods were not included, i. This means that certain goods were produced in different countries with different amounts of capital and labor.
• Price differences are not a prerequisite for starting trade, as different demand structures can exist in the countries.
• The domestic demand ratio is disregarded. When the domestic manufacturing apparatus is unable to meet the strong demand.

literature

• Manfred Borchert: Foreign Trade: Theory and Politics . 7th edition. Gabler, Münster 2001, ISBN 3-409-63907-1 .
• Paul R. Krugman and Maurice Obstfeld: International Economy: Theory and Politics of Foreign Trade . 8th edition. Pearson Studies, Munich 2009, ISBN 978-3-8273-7361-8 .
• Gerhard Rübel: Foreign trade: Basics of real and monetary theory . Oldenbourg Verlag, Munich 2013, ISBN 978-3-486-71660-3 .

Web links

• Duchin, Faye - International Trade - Evolution in the Thought and Analysis of Wassily Leontief
• Kyriakoulakos, Kostas - The Leontief Paradox

Individual evidence

1. ↑ Leontief, Wassily (1954) Domestic Production and Foreign Trade - The American Capital Position Reexamined , Economia Internazionale, (VII): p. 1.
2. ↑ Werner Hoyer and Wolfgang Eibner: Microeconomic Theory . 4th edition. UTB, Stuttgart 2011, ISBN 978-3-8252-8418-3 , p. 212.
3. ^ Paul R. Krugman and Maurice Obstfeld: International Economy: Theory and Politics of Foreign Trade . 8th edition. Pearson Studium, Munich 2009, ISBN 978-3-8273-7361-8 , p. 115.
4. ↑ Borchert, Manfred (1975) Das Leontief Paradoxon , Wirtschaftswwissenschaftliches Studium, 4th year, (Issue 6): p. 295.
5. ^ Paul R. Krugman and Maurice Obstfeld: International Economy: Theory and Politics of Foreign Trade . 8th edition. Pearson Studium, Munich 2009, ISBN 978-3-8273-7361-8 , pp. 154/155.
6. ^ ^{A b} Paul R. Krugman and Maurice Obstfeld: International Economy: Theory and Politics of Foreign Trade . 8th edition. Pearson Studium, Munich 2009, ISBN 978-3-8273-7361-8 , p. 117.
7. ↑ Gerhard Rübel: Foreign trade: Foundations of the real and monetary theory . Oldenbourg Verlag, Munich 2013, ISBN 978-3-486-71660-3 , p. 106.
8. ↑ Borchert, Manfred (2001): Außenwirtschaftslehre. Theory and Politics, Wiesbaden, p. 89.
9. ↑ Manfred Borchert: Foreign Trade: Theory and Politics . 7th edition. Gabler, Münster 2001, ISBN 3-409-63907-1 , pp. 87-89.
10. ^ International Trade - Evolution in the Thought and Analysis of Wassily Leontief. (Accessed: January 14, 2019; PDF; 32 kB)
11. ↑ Borchert, Manfred (1975) Das Leontief Paradoxon , Wirtschaftswwissenschaftliches Studium, 4th vol., (Volume 6): pp. 297–298.
12. ↑ Gerhard Rübel: Foreign trade: Foundations of the real and monetary theory . Oldenbourg Verlag, Munich 2013, ISBN 978-3-486-71660-3 , pp. 106-107.
13. ^ Günter S. Heiduk: Foreign trade: theory, empiricism and politics of the interdependent world economy . Physica-Verlag, Heidelberg 2005, ISBN 3-7908-0181-X , p. 141.