Leontief Paradox Essay

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Wassily W. Leontief (1905–99) was the first scholar to empirically test the predictions  of the HeckscherOhlin  (H-O)  theorem,  one  of four  main  results  of the H-O model (credited  to Eli Heckscher  and Bertil  Ohlin).  This theorem   establishes  a  relationship between a country’s abundance  of factors of production, the intensity with which these factors are used in production, and the country’s trade patterns. It builds on the principle of comparative advantage and states that  countries  will tend  to export  those  goods that use relatively intensively their relatively abundant factors of production.  In other words, a country that is relatively abundant  in, say capital, will tend to export goods that are relatively capital intensive.

Leontief conducted a test in 1953 of the predictions of the H-O theorem, for which he utilized 1947 input/output  data for approximately  200 industries  in the United States. A stylized fact about the post–World War II economy, and 1947 in particular, was that the capital-to-labor ratio in the United States was higher than in any other country. According to the H-O theorem then, U.S. exports in 1947 would, on average, be more capital intensive than imports. In order to test this  prediction,  Leontief aggregated  industries  into sectors  and used the  input-output data to similarly aggregate factors of production in these sectors into two general categories: labor and capital. Using these data, he then calculated estimates of the capital and labor requirements for the production of the typical bundle of exports and imports in 1947.

What  Leontief found was in contradiction to the trade  pattern  predicted  by the  H-O  theorem:  U.S. export industries were on average less capital intensive than import-competing industries in 1947. This contradiction became known as the Leontief paradox.


Since the publication of Leontief ’s paradoxical results in 1953, a voluminous  body of both theoretical  and empirical literature has emerged on the subject. From this literature, several responses to Leontief ’s paradox can be useful in interpreting the validity of the H-O theorem.  The first of these  criticizes  the  choice  of data. The argument is that 1947 was not a normal year because the global economy was still recovering from World  War  II. Leontief ’s  response  to this  criticism was to conduct  a second investigation in 1956 using 1951 trade data. His paradoxical findings persisted.

A second response to the Leontief paradox is anchored in the classification of factors of production into two broad categories: labor and capital. This criticism has given rise to the generalized factor-endowment model that takes into account many sub varieties of capital, land, and human factors, and recognizes that factor endowments  change over time as a result of  technological  endowments.   Specifically, economists  have argued  that  capital  needs  to  be viewed more broadly to include highly skilled labor as a form of (human)  capital. This can help to partly explain Leontief ’s  results:  exports  that  were relatively labor intensive  can be reinterpreted as relatively human-capital intensive and not necessarily intensive in the use of unskilled labor.

Another response to the Leontief paradox has centered on the role of imperfect competition.  The argument  here  is that  trade  provides  a larger  potential market for products, making higher production levels possible (economies of scale), which leads to increased efficiency and competitiveness. This can further help explain Leontief ’s paradox: even though  the United States was capital abundant, imports of capital-intensive goods could have been the result of economies of scale achieved by foreign producers  that gave them a comparative advantage even if their nation was actually labor (not capital) abundant.

Finally, the role of demand characteristics  has also been identified as a potential response to the Leontief paradox. While the H-O theory does well in predicting trade driven by supply conditions  (such as trade in natural resources), it does not do as well in predicting the patterns of trade in manufacturing goods that are influenced by domestic  demand  conditions.  The Linder hypothesis (after Staffan Linder) expanded on the H-O  theorem  by distinguishing  between  supply and demand characteristics  as determinants of trade. If nations  have similar per capita income, then  they have similar  tastes,  i.e., they  will have overlapping demand structures.

Linder’s  hypothesis   predicts   that   nations   with similar demand  structures  are likely to both  import and export similar types of manufactured goods. Linder’s contribution can further  explain the Leontief paradox: U.S. trade with similar-income countries implies trade  in similar goods, i.e., capital-intensive goods made in the United  States can be traded  for capital-intensive  goods made in other countries.  For example, intra-industry trade describes much of U.S. export and import patterns today.

In  conclusion,  Leontief ’s  paradoxical  conclusion has inspired numerous  attempts  to replicate his work with data from other  periods  and countries.  Modified forms  of Leontief ’s  test  continue  to  be examined today and continue to be a standard  method for the analysis of trade.  Although  the H-O  theory  has undergone many refinements, empirical tests have generally produced mixed evidence in support of this factor endowment  theory (and the H-O theorem  in particular). Thus the best way to think about the H-O theory is as one that explains a portion,  rather  than all, of the determinants of trade.


  1. Indian Economic Association, Inderjeet Singh, and Anil Kumar Thakur, Growth and Human Development: Economic Thoughts of Wassily W. Leontief (Deep & Deep Publications, 2008);
  2. Edward E. Leamer, “The Leontief Paradox, Reconsidered,” Journal of Political Economy (v.88/3, 1980);
  3. Wassily W. Leontief, “Domestic Production and Foreign Trade: The American  Capital Position Reexamined,” Proceedings of the American  Philosophic Society (v.97/4, 1953);
  4. Wassily Leontief, Erik Dietzenbacher, and Michael L. Lahr, Wassily Leontief and Input-Output Economics (Cambridge University Press, 2009).

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