Leontief Paradox

Leontief Paradox

The Leontief Paradox is one of the most famous and important contradictions in the history of economics. It was devised by W. W Leontief in contradiction of the H-O theory. Leontief also won a Nobel Prize in Economics for his input-output analysis in 1973.

The H-O theory simply states that a country with a labour intensive economy will export goods produced by it, while a country which is abundant in capital will export capital produced items. The Leontief Paradox opposes this theory with the example of the United States, a capital abundant country. Thus, in terms of the H-O theory United States being a more capital intensive economy, should export goods produced by this capital. However, on empirical analysis by Leontief using his input-output theory, one reached a conclusion that contradicted the H-O theory. Leontief learned that import substitutes by the United States were more capital intensive than its exports. Moreover, Robert Baldwin proved that the U.S imports were 27% more capital intensively produced as compared to exports of 1962 in 1971. This finding further validated the claims by other economists who did not accept the H-O theory.

Leontief soon tried to solve his own paradox by arguing that, the productivity of the labour in the United States was far more as compared to the countries it was getting its imports from. Thus, if the labour input of the country were adjusted by a factor of three, then the United States would actually become a labour abundant country. Despite these suggestions, economists continued to maintain the validity of the paradox.

Subsequent studies showed that ‘human capital’ was in fact a form of capital and that narrowly defining capital could prove to be erroneous. Moreover, Leontief was comparing the exports with import substitutes and not the actual imports. With time many flaws have surfaced with respect to the paradox. Some of them are lack of availability of resources and minerals, trade tariffs and barriers, product differentiation etc. Thus, it is very possible that the applicability of the Leontief Paradox is flawed in this case.

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