[Essay] Leontief Paradox

Introduction

Every nations and country has their own strategy on how to improve and enhance their economic status. In each country, let say in Nigeria, economy is very important because this is where the survival of the country lies. The progress of the economy depends on the abundant resources or source of natural products and those people who are running it or manipulating it. These two factors should work hand in hand in order to determine the weakness and strength of each so that it will immediately fix if there are any loop hole in the transactions. Many people give importance and discuss about the usage of the economy and what is the really purpose of this why is it exists. Economy already exists, but the years go by it keeps upgraded and improve by some theorist and economist. For instance, the Leontief paradox argued that the country’s economy with the world's highest capital-per worker has a lower capital/labor ratio in exports than in imports.

Discussion

All of the empirical tests of international trade theory to be reviewed here involve implications of the models, not of their assumptions. One of the most important implications of both the Ricardian and the Heckscher-Ohlin model is that we can predict what goods individual countries will export and import simply by knowing something about the factors of production available within each country and the input requirements of the goods. Basically, Kravis (1956) found that wages were higher in U.S. export-competing than in import-competing industries. This finding would be consistent with the Heckscher-Ohlin model if industries with high wages also were characterized by high capital requirements. However, Kravis could not find a systematic relationship between U.S. exports and capital requirements per unit of output. But actually, the explanations of the Leontief paradox are nevertheless consistent with the Heckscher-Ohlin model if the assumptions of high wages are considered which are due to human capital which workers have acquired through schooling, on-the-job training, physical health, or work discipline. According to this view and Kravis's findings, U.S. export performance is explained by U.S. comparative advantage in total including human rather than physical capital alone.

Actually, Leontief's own explanation of his findings was that U.S. labor was more effective" than foreign labor, so that U.S. imports which showed up in U.S. production statistics as capital-intensive goods would be produced abroad with labor-intensive methods. Since Leontief's work, economists have rediscovered and analyzed carefully the concepts of human and knowledge capital, which have made the notion of "more effective" labor more precise and which generally support Leontief's proposition.

On the other hand in Nigeria, the idea of human and knowledge capital is based on the simple notion that a type of capital is formed when a person spends a certain time in such activities as building a machine, going to school, or doing research. In each case resources are being used up in current production which is not being consumed. Recall from national income analysis that by definition society's savings and investment in a given time period are equal to the nonconsumed part of production.

More specifically, research and development efforts of Nigerian government may lead to the improvement of machinery and technological processes used in actual manufacture, of the quality of goods and services produced and of the managerial techniques utilized in the organization of business, governments, and other social processes. The stock of knowledge which results in an increased value of output from a given stock of resources is known as knowledge capital. Human capital formation takes place through formal education, on-the-job training, and health care, all of which raise the quality of the services performed and decisions made by labor, management, professionals, and bureaucrats.

For instance, research based on these notions by Grubel (1963) has revealed that in competitive markets individual decision makers have the incentive to equalize marginal rates of return to investment in all three types of capital. Empirical studies by and large have confirmed the validity of these theoretical considerations.

Conclusion

With regards to the effectiveness of Leontief Paradox in U.S., the applications of the human and knowledge capital concepts in the economy of Nigeria may help in the improvement of export performance, as measured by industries' ratios of export to total country’s production, is an increasing function of the proportion of the industries' labor forces in highly skilled categories and of the research and development expenditures expressed as a percentage of the industries' sales. Generally, these findings support the Heckscher-Ohlin theory that countries export goods produced intensively with factors of production they possess in relative abundance. There is a presumption that if human and knowledge capital services were included properly in a Nigerian input-output table, a repetition of Leontief's calculations would show that the Nigeria exports capital-intensive and imports laborintensive products. However, this type of study still must be undertaken.

References:

Kravis Irving. "Wages and Foreign Trade." Review of Economics and Statistics, February 1956.

Grubel. Herbert G. (ed.). International Monetary Reform: Plans and Issues. Palo Alto, Calif.: Stanford University Press, 1963.