the leontief paradox

What is Leontief Paradox Transact Theory

By Deepti Verma

W. W. Leontief received a Nobel Prize in Economics 1973 and is recognized for his input-output analysis. The US is generally recognised to become capital-abundant nation.

Therefore , regarding H-O theory, it is anticipated that the ALL OF US would export capital-intensive items and transfer labour-intensive ones. In 1951, Leontief carried out an scientific test of the H-O theory by applying his input- output technique about American control data of 1947.

This individual estimated factor-intensity of a " representative bundle” of US export products and US import-substitutes. Leontief found that import alternatives of the US were more capital-intensive than its export products. This getting contradicted what H-O theory had predicted and had become known as the Leontief Paradox.

In Leontief's personal words, " America's contribution in division of labour in international trade is based on the specialisation in labour-intensive instead of capital-intensive lines of creation. In other words, the region resorts to foreign trade in order to economise its capital and eliminate its surplus labour, rather than vice versa”. Resolving the Paradox:

The Leontief Paradox evoked a widespread response from academicians. Several attempts were made by simply them to both defend the paradox or perhaps discover its logical imperfections and demonstrate it incorrect. Labour Productivity:

Leontief him self made an attempt to resolve this kind of paradox simply by claiming that US time was a lot more productive than that of the countries from which US acquired its imports. As such, in the event input individuals labour was adjusted (that is, multiplied) by a aspect of 3, US can be ranked as a labour-abundant nation.

However , this kind of claim of Leontief has not been widely approved. His experts maintained the paradox wasn't able to be resolved in this manner. The reason is , in 1947, US labour and capital were both more productive than was the case far away and, therefore , US was still to be ranked as a very capital-abundant region.

The argument among those who claim to know the most about finance on the Leontief Paradox generated the view that there was a need to further explore the concept of ‘human capital” (in addition to physical capital of machinery and equipment, and so forth ) for assessing the main city intensity of your product. ”

Accordingly, in later research it was pointed out that " man capital” was an important element of " capital” insight of a product, and that it might manifest itself in a number of ways.

Man capital has not been just education and training, but likewise covered specific things like " knowledge” of the employees. We may put here that even the concept of " knowledge” should not be construed in a narrow sense of the term. It may also include:

(a) The level of standard awareness of the employees attained by simply them because of technological strategies prevalent near your vicinity;

(b) The attitude of workers toward work;

(c) The " intensity” with which they operate; and

(d) The institutional and legal framework for the extent where it influences efficiency of labour. Evaluating the Non-Comparable:

Leontief was comparing factor-intensity of US exports with transfer substitutes of US and not having its actual imports. It was conceivable (in truth, highly likely) that the US imports had been labour-intensive in the countries with their origin.

It has to be taken into account that Leontief did not have relevant info for testing the factor-intensity of US imports in the countries of their source.

However , this individual argued that using factor-intensity of import- substitutes instead of actual imports did not adjust his finding. He confessed that, capital being abounding and affordable in US, its transfer substitutes was expected to become more capital-intensive than its actual imports. But still, in the event that H-O theory was appropriate, its import-substitutes should be significantly less capital-intensive than its exports. Natural Methods:

It is possible that a capital-abundant nation may possess a deficit of some mineral deposits and other significant natural assets. The technologies involved...

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