Leontief paradox

Leontief's paradox in economics is that a country with a higher capital-per worker has a lower capital/labor ratio in exports than in imports.

This econometric find was the result of Wassily W. Leontief's attempt to test the Heckscher–Ohlin theory empirically. In 1953, Leontief found that the United States—the most capital-abundant country in the world—exported commodities that were more labor-intensive than capital-intensive, in contradiction with Heckscher–Ohlin theory ("H–O theory"). Leontief used this result to infer that the U.S. should adapt its competitive policy to match its economic realities.

For many economists, Leontief's paradox undermined the validity of the Heckscher–Ohlin theorem (H–O) theory, which predicted that trade patterns would be based on countries' comparative advantage in certain factors of production (such as capital and labor). Many economists have dismissed the H-O theory in favor of a more Ricardian model where technological differences determine comparative advantage. These economists argue that the United States has an advantage in highly skilled labor more so than capital. This can be seen as viewing "capital" more broadly, to include human capital. Using this definition, the exports of the United States are very (human) capital-intensive, and not particularly intensive in (unskilled) labor.

Some explanations for the paradox dismiss the importance of comparative advantage as a determinant of trade. For instance, the Linder hypothesis states that demand plays a more important role than comparative advantage as a determinant of trade—with the hypothesis that countries which share similar demands will be more likely to trade. For instance, both the United States and Germany are developed countries with a significant demand for cars, so both have large automotive industries. Rather than one country dominating the industry with a comparative advantage, both countries trade different brands of cars between them. Similarly, New Trade Theory argues that comparative advantages can develop separately from factor endowment variation (e.g., in industrial increasing returns to scale).

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