topic 5.1
Tests of the Classical Model
MacDougall tested the classical model in 1937
- compared the U.S. and The U.K.
- obtained measures of labor productivity for each industry in each country
- U.S. wages were double those in the U.K.
- this implies that the U.S. should be exporting more (relative to the U.K.) of the goods from industries with double or greater the productivity of their counterparts in the U.K.
- the classical model only uses labor inputs - so capital does not enter the story
- the data semmed consistent with this
- a problem is that the classical model does not deal with two countries exporting to a third country with unknown productivities
- other models can explain the export pattern he found
Leontieff tested the HO model
- he invented the input-output table, originally used during WW II to plan the economy
- he used data from the 1950s
- he carried out the following calculation - if the U.S. decreased exports and decreased imports by $1 million each, and the free capital and labor was moved from the export sector to the import sector, would there be enough caspital and labor to replace the missing imports?
- he found that extra capital would be needed and tehre would be surplus labor available after replacing the imports
- this means that the U.S. exported more labor intensive products and imported more capital intensive goods
- since the U.S. was assumed to be capital abundant (an exporter of capital intensive goods)
- this contradicts the HO model - hence the "Leontieff Paradox."
- Vanek explained the paradox as the result of missing a third factor - natural resources
- the HOV model is an HO model that adds a third factor of production - natural resources
- Travis claimed that tariffs distorted the results
- Other suggested explanations were that tastes should be included, or that technologies are not really identical across countries
- a more recnt test by leamer concluded that many other factors should be considered in adddition to labor and capital
- other economists looking at these emprical issues include Maskus, Bowen, Trefler, and Harrigan
