Reconciling Leontief Paradox with Hechscher-Ohlin Therorem

Reconciling Leontief Paradox with Hechscher-Ohlin Therorem

Learner and Levinsohn (1996) are surely correct when they assert that the H.O theorem is neither correct or incorrect. What then are we to expect empirical testing to do? My view is that I want tests to narrow the bounds of belief that one can sensibly have about the world. Negative results do not render the theory useless. But they do suggest that when considering the data of interest, this particular constellation of assumption may not be helpful in making sense of the world. Negative results are interesting insofar as they rule out otherwise appealing set of assumptions. this also suggests that one look for ways of weakening the strict assumptions of the model are most crucial and to which type of data sets one can sensibly apply the various versions of the theory. this study was actually designed to identify the likely sources of the paradox so that Leontief results could be reconciled with the H.O theory.

Wealth Explanation

The predictions of the international trade are based on traditional sources of comparative advantage. These predictions have been challenged by two major empirical findings Leontief (1953) and Trefler 91995, The Former found that US export in 1947 were labor intensive while later, showed that factor service ride is much smaller than predicted by the H.O.V theory, a fact known as the missing trade mystery.

Wynne (2004) showed that two economics with otherwise equal characteristics but with different levels of wealth will have different comparative advantages. Wealthier economics have a comparative advantage in sectors with financial imperfections because wealthier entrepreneurs are better able to overcome incentive problems in borrowing-lending relations. Better incentives imply lower failure rates. This transits into lower lending rates, inducing entrepreneurs to expand production in the small firm sector and thereby driving the country's comparative advantage.