Chapter 5
Tests of Trade Models: The Leontief Paradox
and Its Aftermath
The aim in the first half of this chapter is to discuss in considerable detail both the methodology involved
in tests of several theories of comparative advantage and the results of these tests. Several aspects of this
chapter are relatively unique. First, the literature that is surveyed includes several very recent examinations
of the HO model. Second, there is much more extensive discussion of methodology than is ordinarily
found in texts at this level. We include this material because it is our belief that the Leontief paradox
represents a watershed in the development of the theory of international trade flows. On the one hand,
some critics are rightfully concerned with the adequacy of the tests⎯and we explain why—while on the
◼ Chapter Outline
Introduction
Tests of the Classical Model
Tests of the HO Model
Attempted Reconciliations of Leontief’s Findings
Other Tests of the HO Model
Recent Tests of the HO Model
Intraindustry Trade
Increasing Returns and Imperfect Competition
Conclusions
Summary
Exercises
Chapter 5 Tests of Trade Models: The Leontief Paradox and Its Aftermath 21
◼ Suggested Answers for the End-of–Chapter Exercises
1. Why were Leontief’s findings considered to be paradoxical? Explain.
2. Suppose that the information below represents the complete trade data for each country. Use these
data and Equation 5.1 to calculate values of IIT for each country.
Using the Equation 5.1, we have:
Country A:
IIT = 100 − 50{|10/18 − 5/18|+|8/18 − 1/18|+|0/18 − 12/18|}
3. Discuss various reasons why we might expect countries to engage in intraindustry trade.
First, transportation costs may be a factor. If two parts of a country are very far apart, it might be
4. Explain carefully how Leontief went about testing the HO model. Why is this an incomplete test of
the model?
Leontief compared the factor content of U.S. exports to and imports from the rest of the world in
order to test the HO theory. His principle tool was an input-output table constructed to represent the
22 Husted/Melvin • International Economics, Ninth Edition
5. Discuss the merits of the alternative reconciliations of Leontief’s findings. Why do you think so much
effort was expended in trying to reconcile Leontief’s findings with the HO model?
a. Leontief’s explanation that American labor was more productive than labor in the rest of the
world is logical, although his choice of a factor of three was arbitrary and unsupported by
evidence.
b. Vanek criticized Leontief’s omission of natural resources as a factor of production. If the U.S.
6. How else might the HO model be tested? (Hint: factor price equalization). What would you expect
to find if you were to test this proposition with real-world data? Would this necessarily refute the
model?
7. Explain how each of the alternative models of comparative advantage explains the Leontief paradox.
Human skills: Rather than comparing relative endowments of capital and labor, we should focus on
endowments and intensities of skilled and unskilled labor. Since the U.S. has a more highly trained
8. Would the Linder hypothesis provide a convincing explanation for the pattern of international trade in
wheat? In coal? Explain why or why not.