State Heckscher-Ohlin theory. Explain the Leontief Paradox in this context.
The Heckscher-Ohlin (H-O) theory explains international trade through factor endowments. It posits that a country exports goods that intensively use its abundant and cheap factor, while importing goods that use its scarce and costly factor. Thus, a capital-abundant country should export capital-intensive goods and import labor-intensive ones, assuming identical technology and tastes.
The Leontief Paradox challenged this view. In 1953, Wassily Leontief’s input-output study of the United States—then the most capital-abundant nation—showed the opposite: US exports were more labor-intensive, while imports were more capital-intensive. This contradicted the H-O prediction.
Explanations included the importance of human capital (skilled labor distinct from unskilled), technological differences across nations, taste preferences for capital-intensive goods in the US, as well as trade barriers and the role of natural resources.
While not disproving H-O theory, the paradox exposed its limits, showing that real-world trade requires broader models beyond simple two-factor assumptions.
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