Heckscher-Ohlin Theory & The Leontief Paradox

Heckscher-Ohlin Theory & The Leontief Paradox

Summary of video

• Ricardo believed comparative advantage come from differences in labour productivity
• Heckscher-Ohlin theory posits that comparative advantage comes from factor endowments
• Countries will export goods in which they have relative abundance of factor endowments
• In other words, they will export goods which make use of locally abundant (relatively) resources. They will import goods in which need relatively scarce local endowments
• Theory supports idea that free trade is beneficial

Leontief paradox

• Leontiff examined US exports of capital goods
• US relatively abundant in capital: expect US to be exporter of capital intensive goods and importer of labour intensive goods
• Reality was that US exports were less capital intensive than its imports

Possible explanation

• Reason for paradox not clear
• Possibly US exports goods that require knowhow (e.g. software), imports goods that require large amounts of capital
• Perhaps technology drives international differences in productivity.
• Once researchers control for differences in technology, H-O theory gains some of its predictive power