Leontief Paradox

Leontief (1953) confronted the HO model with data.

He developed the set of input-output accounts for the US economy,

which allowed him to compute the amounts of labour and capital used
in each industry for 1947.

He utilised US trade data for 1947 to compute the amounts of labour

and capital used in the production of $1 million of US exports and
imports.

Results in the following table

Leontief (1953) test

Exports Imports
Capital ($ million) $2.5 $3.1
Labour (person-years) 182 170
Capital/labour/($/person) $13700 $18200

Calculation of capital and labour required for exports: Direct and

indirect

Calculation of capital and labour required for imports: No knowledge

of the foreign technology. Leontief used US technology to calculate.

According to these calculations capital/labour ratio in imports was

higher than that of in exports. Whereas US was capital abundant in
1947.

This appears to contradict the HO theorem.

These findings came to be called “Leontief paradox”

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A wide range of explanations have been offered for this paradox:

- US and foreign technologies are not the same

- By focusing only on labour and capital, Leontief ignored land
- Labour should have been disaggregated by skill (since it would
not be surprising to find that US exports are intensive in skilled
labour)
- The data for 1947 may be unusual, since World War II had just
ended
- The US was not engaged in free trade, as the HO model assumes

Leamer (1980) provided a definite 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 that the capital/labour
ratios in exports and imports, as reported in the table should not be
compared.

Leamer proposed an alternative test: The test using “factor content”

version of the HO model developed by Vanek (1968).