What we now know about the mixtures of productive factors that make up the exports and imports of leading nations has been learned largely because Wassily Leontief was puzzled in the 1950s.

Leontief, a Nobel Prize winner in economics, set off a generation of fruitful debate by following the soundest of scientific instincts: testing whether the predictions of a theory really fit the facts.

Leontief decided to test the Heckscher–Ohlin theory that countries will export products whose production requires more of the country’s abundant factors and import products whose production relies more on the country’s scarce factors.

He assumed that the U.S. economy at that time was capital-abundant (and labor-scarce) relative to the rest of the world.

LEONTIEF’S K / L TEST Leontief computed the ratios of capital stocks to numbers of workers in the U.S. export and import-competing industries in 1947. This computation required figuring out not only how much capital and labor were used directly in each of these several dozen industries but also how much capital and labor were used in producing the materials purchased from other industries. As the main pioneer in input–output analysis, he had the advantage of knowing just how to multiply the input–output matrix of the U.S. economy by vectors of capital and labor inputs, export values, and import values to derive the desired estimates of capital/labor ratios in exports and importcompeting production. So the test of the H–O theory was set. If the United States was relatively capital-abundant, then the U.S. export bundle should embody a higher capital/labor ratio ( K x / L x )

than the capital/labor ratio embodied in the U.S.

production that competed with imports ( K m / L m ).

Leontief’s results posed a paradox that puzzled him and others: In 1947, the United States was exporting relatively labor-intensive goods to the rest of the world in exchange for relatively capital-intensive imports! The key ratio

( K x / L x )/( K m / L m ) was only 0.77 when H–O said it should be well above unity. Other studies confirmed the bothersome Leontief paradox for the United States between World War II and 1970.

BROADER AND BETTER TESTS The most fruitful response to the paradox was to introduce other factors of production besides just capital and labor. Perhaps, reasoned many economists

(including Leontief himself), we should make use of the fact that there are different kinds of labor, different kinds of natural resources, different kinds of capital, and so forth. Broader calculations of factor content have paid off in extra insights into the basis for U.S. trade. True, the United States was somewhat capital-abundant, yet it failed to export capital-intensive products. But the post-Leontief studies showed that the United States was also abundant in farmland and highly skilled labor.

And the United States was indeed a net exporter of products that use these factors intensively, as H–O predicts.

DISCUSSION QUESTION When Leontief published his results, should economists have abandoned Heckscher–Ohlin as a theory of international trade?