Question

For the multiple choice, please check all that apply

The factor-endowment theory predicts that because the United States is relatively abundant in capital and relatively scarce in labor, it will export capital-intensive goods, and its import-competing goods will be labor intensive. In the 1950s, Wassily Leontief, a Russian-American economist, tested this proposition by analyzing the capital/labor ratios of export industries and import-competing industries, using U.S. data. He found that the capital/labor ratio for U.S. export industries was lower than that of the United States' import-competing industries, which means that U.S. exports were less capital intensive than import-competing goods. These findings appeared to contradict the predictions of the factor-endowment theory and became known as the Leontief paradox Replicate Leontief's test using the data shown in the following table. Compute the capitalabor ratio for exports and imports, and enter each value in the last column of the table. Labor (Person-years) Capital/Labor Ratio (Dollars per person-year) Used to produce $1 Million Worth of ... Exports Imports Capital (Dollars) 3,300,000 3,200,000 100 The numbers in the previous table show that U.S. exports are and U.S. Imports are What do the results of your test illustrate? Check all that apply. The Leontief paradox The Heckschner-Ohlin theory Which of the following explanations resolve the Leontief paradox? Check all that apply. The United States was not engaged in completely free trade. Leontief's test distinguished between skilled and unskilled labor, but ignored capital. Leontief ignored land abundance in the United States. Leontief wrongly assumed that the United States was abundant in capital.

Answer 1

Capital to labour ratio for exports is : 3300000/120 = 27500

Capital to labour ratio for imports is: 3200000/100 = 32000

This shows that US exports are more labour intensive and US imports are more capital intensive.

These results illustrate Leontief paradox which basically is a paradox to HO theory. According to HO theory a capital abundant nation will export the capital intensive good and import labour intensive good whereas a labour abundant nation will export labour intensive good and vice-versa under free trade. This would mean that US , a capital abundant country would have a high capital-Labour ratio in its exports but Leontief found the opposite.

Hence above results comply with Leontief paradox.

Explanation to Leontief paradox is :

1) US doesn't engage in free trade. There are a lot of protectionist measures used by countries which hinders the free movement of goods across borders and hence the condition under which HO theory holds is violated and therefore gives contradictory results.

2) Leontief didn't take into account the presence of a third factor of production like land. An explanation can be found if we take into account the presence of land. Suppose a good uses more capital than labour and is intensive in Land. If land and capital are substitutes then it might be the case that import competing goods in US are capital intensive in US

2nd option given is not correct because he didn't distinguish between skilled and unskilled labour but took only two factor labour and capital.

4th option is factually wrong as US is a capital abundant country.