Leontief's Paradox

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1.1. The old and the new trade theories
The traditional trade theories, namely Ricardian model and Heckscher – Ohlin model emphasize comparative advantages as the basis of the international trade, that is, inter – industry trade. The idea is that only when countries are different from each other, there is trade among them and; countries can benefit from their differences by exchanging the things they do not or cannot produce. Countries would export goods in one set of industries and import goods in another set of industries (inter – industry trade). While the Ricardian model explained the flow of goods between countries using their technological comparative advantages to specialize in the production of different goods, the Heckscher Ohlin
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However, there are some explanations for the Leontief paradox. Firstly, it needs to take technology into consideration. In fact, US and foreign technologies are not the same, in contrast to Heckscher – Ohlin and Leontief assumed. Secondly, by focusing only on the labor and capital as the model suggested, Leontief ignored land abundance in the US which plays a great role in productivity. Thirdly, Leontief should have distinguished between skilled and unskilled labor because the US exports are intensive in skilled labor. Fourthly, the US was not engaged in completely free trade as the H – O model assumes. And lastly, the data for 1947 maybe were unusual because World War II had ended just two years …show more content…
Does exporting force growth in productivity through learning by exporting? Research from many studies across industries has confirmed that high – productivity induce entry into export markets (self – selection). This can be easily understood because only firms with sufficiently high – profits can cover the sunk costs of entering the export markets and have competitive advantages to stay and make profits in the export markets. However, there is a small possibility of “learning by exporting” when some recent research on low income countries finds productivity improvement after entry. It can be explained that when firms enter export markets, firms are forced to boost their productivity growth. For example, facing to the tough competition by other rivalries in the export markets, a firm has motivations to create innovation of their technology, differentiate their products or seeking strategies to reduce their

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