International trade · Lesson 6 of 8
Testing the theory: the Leontief paradox
In 1953 Wassily Leontief took the most capital-rich economy in the world and checked whether it exported capital-intensive goods, as Heckscher–Ohlin says it should. It didn’t. The search for the reason shaped trade theory for the next thirty years.
A question to hold on to
Put these in order, earliest first: (A) the Leontief paradox; (B) the factor proportions theory; (C) the absolute advantage theory; (D) the comparative advantage theory.
CUET 2023Solved at the end ↓
1953
The test
Leontief had built an input–output table of the American economy: how much each industry buys from every other, and how much labour and capital it uses. That let him count the labour and capital used, directly and through all the inputs, to make any bundle of goods.
He asked: if the United States cut its exports and its imports by $1 million each, making the imported goods at home instead,
- how much capital and labour would be released from export industries, and
- how much would be needed in import-competing industries?
Heckscher–Ohlin says a capital-abundant country exports capital-intensive goods. So exports should embody more capital per worker than import replacements.
The numbers
The result, and why it was a paradox
| Per $1 million, 1947 | Capital | Labour (person-years) | Capital per worker |
|---|---|---|---|
| Exports | $2,550,780 | 182.313 | $13,991 |
| Import replacements | $3,091,339 | 170.004 | $18,184 |
American import replacements used about 30% more capital per worker than American exports (18,184 against 13,991 dollars). So the United States was exporting labour-intensive goods and importing capital-intensive ones.
Leontief’s test was a test of Heckscher–Ohlin (Hyderabad 2013). The result was a paradox because the United States was believed, by everyone, to be the most capital-abundant country in the world (Hyderabad 2021). Either the theory was wrong, or the test was.
The debate
Seven explanations
| Explanation | The argument |
|---|---|
| Labour productivity (Leontief) | An American worker was about three times as productive as a foreign one. Count each American as three workers and the US is labour-abundant. Most economists found this unconvincing, since better American capital would raise its productivity too. |
| Human capital (Kravis, Kenen) | American exports used highly skilled, well-paid labour. Count skills as capital and American exports are capital-intensive after all. This is the most widely accepted explanation. |
| Natural resources (Vanek) | The US imported mining and oil products, which need a lot of capital. A two-factor test leaves land out, so resource-intensive imports look capital-intensive. |
| Tariffs (Travis) | US tariffs protected labour-intensive industries most, cutting labour-intensive imports. |
| Demand bias | If Americans strongly preferred capital-intensive goods, capital could be dear in the US despite being plentiful: capital-abundant by the physical definition, not by the price definition (Lesson 4). |
| Factor-intensity reversal (Minhas, 1962) | A good can be capital-intensive in the US and labour-intensive abroad. Then measuring imports with US technology misleads. Minhas found reversals in the data; later work found them less common. |
| The wrong comparison (Leamer, 1980) | The US ran a trade surplus in 1947. With unbalanced trade the right test compares capital per worker in what a country produces with what it consumes. By that test the US was revealed capital-abundant, and the paradox disappears. |
What it led to
The search for an explanation pushed economists toward skills, technology and scale as sources of trade: the theories of Lessons 7 and 8. The human-skills theory is often listed among the “modern” theories for exactly this reason.
Pause and predict
Leontief's results were considered paradoxical because the United States was believed to be
Solving the opening question
The opening question, solved
CUET 2023 · standard
Order: Leontief paradox, factor proportions theory, absolute advantage, comparative advantage.
- Absolute advantage.Smith, 1776.
- Comparative advantage.Ricardo, 1817.
- Factor proportions.Heckscher 1919, Ohlin 1933.
- The paradox.Leontief, 1953, testing the factor proportions theory.
Answer
C, D, B, A.
Watch out for
The mistakes examiners are fishing for
- What was tested. Leontief tested Heckscher–Ohlin, not Ricardo or the opportunity cost theory.
- Which way round. US exports were less capital-intensive than its import replacements.
- Why a paradox. Because the US was thought capital-abundant, not labour-abundant.
- Imports were measured by US technology. Leontief used the factors needed to make import substitutes at home, which is why intensity reversal matters.
Revise
The lesson on one screen
The lesson on one screen
- Leontief (1953)
- Input–output test of Heckscher–Ohlin on 1947 US data.
- Finding
- Import replacements needed ~30% more capital per worker than exports: $18,184 against $13,991.
- Paradox
- The US was believed capital-abundant, so H–O predicts the opposite.
- Explanations
- Labour productivity, human capital, natural resources, tariffs, demand bias, factor-intensity reversal (Minhas), Leamer's correction.
- Legacy
- Pushed trade theory toward skills, technology and scale.
Practice
Check yourself
Compute
The ratio
Import replacements need $3,091,339 of capital and 170.004 person-years per $1 million; exports $2,550,780 and 182.313. What is (K/L of imports) ÷ (K/L of exports)?
Quick questions
1The Leontief paradox refers to an empirical test of
2The explanation of the paradox most economists accept is
Real questions
Past papers, by level
Standard
Labour tables, terms-of-trade bands, the theorems applied, and statement and matching questions, up to JNU level.
3 questionsPractise →
All 3 past-paper questions for this lesson, easiest first: practise the full set →
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