world of economics
- The first empirical test of the Heckscher-Ohlin model was conducted by Wassily Leontief in 1951 using U.S. data for the year 1947.Since the United States was the most K-abundant nation in the world, Leontief expected to find that it exported K-intensive commodities and imported L-intensive commodities.
- For this test, Leontief utilized the input-output table of the U.S. economy to calculate the amount of labor and capital in a “representative bundle” of $1 million worth of U.S. exports and import substitutes for the year 1947. (The input-output table is a table showing the origin and destination of each product in the economy. Leontief himself has contributed importantly to the development of this new technique of analysis and received the Nobel Prize in 1973 for this contribution.)
- To be noted is that Leontief estimated K/L for U.S. import substitutes rather than for imports. Import substitutes are commodities, such as automobiles, that the United States produces at home but also imports from abroad (because of incomplete specialization in production). Leontief was forced to use U.S. data on import substitutes because foreign production data on actual U.S. imports were not available. However, Leontief correctly reasoned that even though U.S. import substitutes would be more K intensive than actual imports (because K was relatively cheaper in the United States than abroad), they should still be less K intensive than U.S. exports if H-O model held true. Of course, the use of the U.S. data on import substitutes, instead of foreign data on actual U.S. imports, also eliminated from the calculations commodities, such as coffee and bananas, not produced at all in the United States.
- The result of Leontief test was startling. U.S. import substitutes were about 30 percent more K intensive than U.S. exports. That is, the Unites States seemed to export L-intensive commodities and import K-intensive commoities.This was the opposite of what the H-O model predicted, and it became known as the Leontief Paradox.