Question

4. Resolution of the Leontief paradox 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 capital/labor ratio for exports and imports, and enter each value in the last column of the table. Used to Produce $1 Million Worth of . . . Capital Labor Capital/Labor Ratio (Dollars) (Person-years) (Dollars per person-year) Exports 1,800,000 100 Imports 3,000,000 100 The numbers in the previous table show that U.S. exports arelabor intensive , and U.S. imports arecapital intensive . What do the results of your test illustrate? Check all that apply. The Heckschner-Ohlin theory The Leontief paradox Which of the following explanations resolve the Leontief paradox? Check all that apply. Leontief wrongly assumed that the United States was abundant in labor. Leontief did not distinguish between skilled and unskilled labor. Leontief calculated capital/labor ratios for exports and imports, while the Heckscher-Ohlin model compares labor/capital ratios. Leontief’s test focused on labor and capital only, ignoring other factors of production.

Replicate Leontief’s test using the data shown in the following table. Compute the capital/labor ratio for exports and imports, and enter each value in the last column of the table.

Used to Produce $1 Million Worth of . . .	Capital	Labor	Capital/Labor Ratio
	(Dollars)	(Person-years)	(Dollars per person-year)
Exports	1,800,000	100
Imports	3,000,000	100

Question 1: The numbers in the previous table show that U.S. exports are: pick one (capital intensive, labor intensive, neither capital nor labor intensive, both capital and labor intensive), and U.S. imports are: pick one (capital intensive, labor intensive, neither capital nor labor intensive, both capital and labor intensive) .

Question 2: What do the results of your test illustrate? Check all that apply.

The Heckschner-Ohlin theory

The Leontief paradox

Question 3: Which of the following explanations resolve the Leontief paradox? Check all that apply.

Leontief wrongly assumed that the United States was abundant in labor.

Leontief did not distinguish between skilled and unskilled labor.

Leontief calculated capital/labor ratios for exports and imports, while the Heckscher-Ohlin model compares labor/capital ratios.

Leontief’s test focused on labor and capital only, ignoring other factors of production.

Answer 1

Capital labor ratio for exports = capital / labor = 1800000/80 = 22500

Capital labor ratio for imports = capital / labor = 3000000/100 = 30000

Since capital labor ratio is greater for imports, it implies that US is importing capital intensive goods and so

• US exports are labor intensive
• US imports are capital intensive

The test is verifying Leontief assertion because US that is a capital abundant nation exports labor intensive goods.

Note that Leontief used many goods and services in the data and all labor was assumed skilled. Hence the correct choices as explanations include 1st and 3rd statements. (skilled vs unskilled and only two goods).