International Business Chapter 9 Heckscherohlin Theorem Since The United States Was Generally Thought Relatively Capitalabundant Country

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CHAPTER 9

EMPIRICAL TESTS OF THE FACTOR ENDOWMENTS APPROACH

Learning Objectives:

■ Describe the Leontief paradox pertaining to the failure of the U.S. trade pattern to

I. Outline

Introduction

– Theories, Assumptions, and the Role of Empirical Work

The Leontief Paradox

Initial Explanations for the Leontief Paradox

– Demand Reversal

– Factor-Intensity Reversal

– U.S. Tariff Structure

II. Special Chapter Features

In the Real World: Testing for Factor-Intensity Reversals

In the Real World: Heckscher-Ohlin and Comparative Advantage

III. Purpose of Chapter

The main purpose of this chapter is to summarize various tests of the Heckscher-Ohlin

theorem as a predictor of trade patterns among countries, in order to acquaint students not only

with the applicability/non-applicability of Heckscher-Ohlin in practice but also with relevant

testing techniques. In addition, we have included material on the growing income inequality in

IV. Teaching Tips

A. The chapter begins with a discussion of a broader role for empirical work in international

trade. Davis and Weinstein (Eastern Economic Journal, Fall 1996) suggest that empirical work

can be a key to analyzing the assumptions associated with different theories. This is exactly

what students need to be doing in this chapter. Through examining the various tests of the

Heckscher-Ohlin theorem, the students will increase their understanding of the strict assumptions

made in the model and can determine which assumptions are crucial.

B. Very few undergraduates seem familiar with input-output analysis. If time permits,

elaboration of that valuable analytical technique can be useful.

D. Because there are continuing tests of Heckscher-Ohlin appearing in the literature, we

suggest that you supplement the “more recent tests” section of the chapter with later work as it

E. The issue of inequality is one that excites interest, perhaps because it is one that students

seem not to have thought about in any systematic way. In addition, our experience is that many

of our students come from families well above the median income level and don’t really realize

it, so discussion of inequality is eye-opening to them. We suggest that you have students find

F. The material in the fourth “In the Real World” box provides a nice opportunity to

examine the (politically-sensitive) issue of outsourcing with students.

V. Answers to End-of-Chapter Questions and Problems

1. The Leontief paradox was the finding by Wassily Leontief in 1953 that the capital/labor

ratio utilized in U.S. import-substitute industries when weighted by import importance was

2. This is a judgmental question because several explanations involving demand reversal,

factor-intensity reversals, the U.S. tariff structure, labor skills, and natural resources have been

3. With factor-intensity reversal, suppose U.S. exports that would be produced abroad by

relatively capital-intensive techniques are produced with relatively labor-intensive techniques in

the United States. In addition, suppose that U.S. imports that are relatively labor-intensive in

production in the supplying countries are produced in relatively capital-intensive fashion in the

United States. If the United States is relatively capital-abundant, it is thus importing goods that

4. The answers to this question will vary with student experiences. When traveling in

developed countries, the students will most likely not have observed demand patterns to vary

much across countries, with an emphasis on goods that are relatively “high tech” in nature or

5. These barriers may reflect the desire to engage in import substitution, with the labor-

abundant low-income developing countries in particular feeling threatened by perceived higher

quality labor-intensive products from newly-industrializing countries and developed countries.

6. This answer requires some judgment on the part of the student as to the relative success

of the Heckscher-Ohlin tests discussed in the chapter. Certainly the two-factor Heckscher-Ohlin

model is a good candidate for being discarded in empirical work, but the multifactor approach

7. A sample answer:

The rise in income inequality in the last 10-25 years has occurred at the same time

that the U.S. economy has experienced a substantial rise in its imports/GDP ratio.

Because many of these imports have come from relatively labor-abundant

developing countries and are relatively unskilled labor-intensive goods that were

manufactured or assembled in these countries, there has been relatively less

demand for domestic unskilled labor and hence downward pressure à la Stolper-

Samuelson on the wages of that part of the U.S. labor force. At the same time, the

8. A sample answer:

While it is clear that increased income inequality and increased U.S. openness to

imports have occurred at the same time, trade is but one of several factors in

today’s rapidly-changing world that have led to the greater inequality. The nature

from manufacturing to services, rather than to trade itself.

VI. Sample Exam Questions

1. How can it be said that the factor-content approach “reveals” a country’s factor

abundance? What assumptions seem crucial for making this inference? Explain.

2. The text notes that, if demand reversal were the cause of the Leontief paradox, then labor

would be relatively cheap in the United States. Explain the reasoning behind this statement.

4. The European Union has heavily protected its farm sector through import duties; in

addition, the Union subsidizes its exports of agricultural products. If “cropland” is regarded as a

factor of production and is included in the Leontief statistic (along with, say, labor), how would

the presence of these agricultural policies affect the results of such tests? Explain.

5. If factor-intensity reversals were indeed prevalent in the real world, how might this fact

be used to explain the Leontief paradox? If this explained the paradox, would it suggest that any

6. Why can it be suggested that the fact that the ratio of skilled labor/unskilled labor has

risen in almost all U.S. industries in recent years (and not just in traded goods industries) lends

support to the view that increased inequality in the United States is not primarily due to increased

Heckscher-Ohlin-type trade? How might you counter this suggestion?

8. (a) Explain how the Heckscher-Ohlin theorem is obtained, using either the

“physical” definition or the “price” (or “economic”) definition of relative

factor abundance.