Leontif Paradox and the Factor-endowment Model

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• How does the Leontif paradox challenge the overall applicability of the factor-endowment model? To understand how the Leontif paradox challenges the overall applicability of the factor-endowment theory, you must first comprehend what the factor-endowment theory asserts. The factor-endowment theory states that trade between nations is based on the difference in pretrade product prices. Pretrade product prices are dependent on production possibilities. Production possibilities can be linear as in constant cost conditions or curved as in increasing cost conditions. Based on the cost per unit, a county will specialize in the production of a product that they have a comparative cost advantage. According to the factor-endowment theory, a nation will export that product for which a large amount of the relatively abundant resource is used, whether its labor, raw materials or capital. It will import that product in the production of which the relatively scarce resource is used (Carbaugh 68). So nations with a large population representing cheap unskilled labor will export manufactured goods that it can produce cheaply. A nation with abundant capital but more expensive labor will export products that take a more skilled labor force that other nations cannot produce at a reasonable cost. “Following the development of the factor-endowment theory, little empirical evidence was brought to bear about its validity” (Carbaugh 68). For some economists, such generalizations were sufficient to illustrate the validity of the factor-endowment theory but others demanded stronger evidence (Carbaugh 79). In 1954 Wassily Leontief was the first to attempt to test the factor-endowment theory with real data. It was well known that the... ... middle of paper ... ...goods. According to the World Trade Organization International Trade Statistics 2013, between 2005 and 2012 Asia’s worldwide exports manufactures increased from 31.7 % to 38.5% while North America’s decreased from 15.1% to 13.8% (WTO 80). Granted this is manufactured products as a whole rather than by commodity but it represents a trend regarding manufactured goods where Asia’s exports are increasing while North America’s exports are decreasing. This indicates that that manufacturing is continues to move from North America to Asia. Works Cited Carbaugh, Robert J., “International Economics”, 12th ed., Mason, OH: Thomson South-Western, a part of the Thomson Corporation, 2009. “International Trade Statistics 2013”, World Trade Organization, (2013), p 80, Web. 01/17/2014,

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