Reconsideration of Leontief Paradox by the Ricardo-Heckscher-Ohlin Model

Abstract

Leontief’s test by using 1947 data showed that US as a capital abundant country exported labor-intensive commodities. Most studies and tests after Leontief test were to try to clear the paradox or to show the test results were wrong in somewhere. This paper demonstrates that a capital abundant country can export labor input as net factor content of trade from the Ricardo-Heckscher-Ohlin Model (Guo 2015b). This is the first study from the theoretical angle to predict that the conclusion of Leontief test is acceptable. It also demonstrates that commodity trade is not only indirect trade of factor endowments, but also of indirect trade of technologies. The study summarizes three trade types by factor trade directions. The first one is the balanced factor content of trade or Heckscher-Ohlin type, in which home country’s factor content of trade, exported, equals foreign country’s factor content of trade, imported. The second type is the homogeneous factor content of trade, in which if home country exports capital input and imports labor input, foreign country will imports capital input and export labor input. Amounts of factor content of trade of two counties are not exact same by the different productivity of factors of two countries. The third type is the asymmetrical factor content of trade, in which two countries export net same type factor input and import same type factor input, i.e. if home country exports capital services and imports labor services, foreign country also exports capital services and imports labor services. This is caused by differences of productivities of factors and by the differences of technology structures, across two countries. Some of Literatures explained the Leontief paradox by factor intensity reversal (FIR). This paper demonstrates that the FIR explanation, an insight prediction, is right; however the trade is an asymmetrical factor content of trade. The numerical example of this paper exactly repeats the case that a capital abundant country exported labor-intensive commodities under free trade equilibrium.