Which of the following statements is true of the Leontief paradox?
A) It shows an anomaly that occurs when a nation has high domestic demand for a product.
B) It explains the relationship between domestic demand and comparative advantage.
C) It disproved Ricardo’s theory of comparative advantage.
D) It raised questions about the validity of the Heckscher-Ohlin theory.
- The Correct Answer for the given question is Option D) It raised questions about the validity of the Heckscher-Ohlin theory.
Answer Explanation in Detail
According to economist Wassily Leontief, the Leontief paradox was a result of his study of the U.S. economy in the 1940s that contradicted Heckscher-Ohlin’s predictions. Based on a theory developed by economists Eli Heckscher and Bertil Ohlin, a country exports goods that it is relatively efficient at producing and imports goods that it is relatively inefficient at producing. Leontief’s study, however, found that US exports more labor-intensive goods and imports more capital-intensive goods despite its relative superiority in producing capital-intensive goods.
Further research and refinement of the Heckscher-Ohlin theory were prompted by this paradox, which raised questions about the theory’s validity. A lack of consideration of other factors such as technological advancements, transportation costs, and government policies was later discovered as the reason for the Leontief paradox. Moreover, the Heckscher-Ohlin theory ignored factors such as natural resources, human capital, and technology because it only considered labor and capital. It led to a more nuanced understanding of international trade patterns as a result of the Leontief paradox, which highlighted the limitations of Heckscher-Ohlin theory.
In International economics, “The Heckscher-Ohlin theory” is considered to be one of the most influential theoretical concepts. Since the theory makes a few simplifying assumptions, it is preferred over Ricardo’s Theory by most economists. The theory has been subjected to many empirical tests because of its influence on the scenario of international trade. There are many tests that raised questions regarding the validity of the Heckscher-Ohlin theory(H-O Theory) during the famous study that was published in 1953 by a Noble Prize winner in economics (1973), “Wassily Leontief”.
Leontief postulated that as compared to other countries in the world the United States does have a sufficient amount of capital. Then as per the H-O Theory, United States would labor-intensive goods and export capital-intensive goods. But looking at the trade data of import and export of the United States, the result seems to deviate from that the theory actually predicted. Wassily Leontief found out that the export seems to be less capital intensive than the imports. Since the result sounds variance with what the theory actually predicted, it is regarded popularly as Leontief Paradox. For More…..