FREC 410
International Ag. Trade & Marketing
Empirical Evidence
for HO Trade Models:
Leontief’s Paradox
Dr. Titus Awokuse
http://www.udel.edu/FREC/Awokuse/FREC410_webpage.htm
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Importance of Empirical Testing
Sources & Types of Trade Data
„ Econometric models are used to test the
validity of international trade theories
Statistical analysis of economic data to test
validity of theoretical relationships between
variables
„ However, different econometric studies
reach _________________________
„
„
Types of Trade Data
Exports
and Imports
Prices
Exchange
rates
Domestic & International
„
Sources
Print
publications
Electronic (Websites) – CDROM, Tape, etc
Given available data, there are no consensus on
the methods for deciding which conclusion is
accurate
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H-O Model: Empirical Evidence
„
„
The Leontief Paradox (LP)
Leontief (1953) study of US trade patterns:
„ First attempt to test validity of H-O Model
„ Examined the actual ___________________
of US imports
Question:
„ Does data provide empirical support of the
patterns of trade predicted by HO models?
More emphasis on testing of economic theories
Ricardian and H-O models have faced scrutiny
greater emphasis on H-O models
Empirical data on trade patterns NOT
consistent with H-O ___________________
Does
factor-abundant country export the given
commodities?
Does factor-scarce country import the given
commodities?
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What did Leontief do?
What is the Leontief Paradox?
„
„
Result: paradoxical conclusion on US trade
US
„
was most K-abundant nation in the world
Exported
L-intensive goods
Imported
______________ goods
This
„
„
„
„
result is known as: Leontief Paradox
He used 1947 input-output table of US economy
Aggregated industries into _____________
But only 38 industries produced traded goods
Other 12 industries produced non-traded goods
Aggregated factors into 2 categories: K and L
He estimated the K and L requirements to produce:
One
million dollars worth of typical exportable
and ______________________
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Explanations for LP
The Leontief Paradox (LP)
„
1. Higher Efficiency of US Workers:
His Findings / Results:
Leontief
(1956) repeated test with 1951 data:
US imports were 6% more K-intensive than exports
Baldwin (1971) used 1962 US trade data:
„ Results similar to Leontief’s
„ US imports were 27% more K-intensive than _______
„
„
said: US labor was __________________
Given
similar K/L ratio among nations, higher US worker
efficiency attributed to superior economic organization
and _______________________________
Most
economists disagree because:
„ If superior organization increased L productivity, it
should have raised K too
„ So, K/L should have remain unchanged
Trade patterns of other countries:
•
•
•
•
Leontief
Japan: consistent with HO
Canada: NOT
India: consistent
East Germany: ______________
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Explanations for LP
Explanations for LP
2. Inclusion of Human Capital:
Human
It’s
3. Role of Natural Resources:
K is created by education
Leontief’s
similar to investment in _________________
There
two ways to include human K:
„ Divide L by skill groups: US is abundant in skilled L
„ Add human K to physical K (I.e. K = Kp + Kh)
Paradox
US
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resolved when human K is included
Only
production function is oversimplified
two factors included: K and L
Ignored
role of natural ___________________
Some
imports are natural resource-intensive:
aluminum, gold, diamond, coffee, oil
exports goods using skilled L intensively, and imports
goods using its ____________factor (unskilled L)
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Explanations for LP
Explanations for LP
5. Distortions in Trade:
4. Demand Bias:
Trade restrictions could contribute to the paradox
Why? L-intensive goods are often ______________
„ Paradox may result:
„
K-abundant
nation can import K-intensive goods if
domestic demand is biased to K-intensive goods
Abundant factor will become scarce if demand bias
outweighs the effect of the existing abundance in K
Little
„
if
empirical evidence to support this hypothesis
imports of L-intensive goods were restricted
But,
Houthakker (1957) found demand patterns between
„
imports of K-intensive goods were unrestricted
This explanation is not as plausible because:
Tariffs
tend to reduce trade volumes,
but not reverse commodity _________________
________________________
Import
tariff cannot induce a country to export goods
that intensively use its scarce factor
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Explanations for LP
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Implications of Empirical Testing
6. Misspecification of H-O Tests:
„
Two-fold impact of Testing Trade Theories:
Leamer (1980) arguments:
Leontief’s
approach of comparing K/L ratio in X and M
is not appropriate IF a country exports BOTH Kintensive and L-intensive goods
He suggested an alternative conceptual formulation
K/L ratio in net X is compared to that in consumption
and production
„
By adopting this approach, __________________
„
Others suggested alternative tests using a logit
model
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„
Evidence _________________ and increase
our level of confidence in using the models for
policy analysis
„
Testing results in progress in economic
influenced
the reformulation and improvement of
current and alternative models
Stimulates the development of _________________
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