International Business Lecture No,22 By Dr.Shahzad Ansar

The Leontief Paradox

The Leontief Paradox As per Heckscher-Ohlin Factor endowment model USA should Export capital intensive items and import labor intensive items. But The fact is not this. USA is importing even automobiles and exporting new innovations, or special Skilled Items like aircrafts

The Leontief Paradox The best Theory then that explains The Leontief Paradox in this situation is Ricardo’s theory that says,—gains from trade will occur even in a country that has absolute advantage in all products because the country must give up less-efficient output to produce more-efficient output

Product Life-Cycle Theory (Raymond Vernon, 1966) Article in the Quarterly Journal of Economics. As products mature, both location of sales and optimal production changes. Affects the direction and flow of imports and exports. Globalization and integration of the economy makes this theory less valid.

The Product Life-Cycle Theory 4-24 The Product Life-Cycle Theory 160 140 120 100 80 60 40 20 United States Other Advanced Countries Developing Countries Stages of Production Development New Product Standardized Product Maturing Product Imports Exports production consumption Exports Figure 4.5 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

The New Trade Theory Began to be recognized in the 1970s. Deals with the returns on specialization where substantial economies of scale are present. Specialization increases output, ability to enhance economies of scale increase.

The New Trade Theory In addition to economies of scale, learning effects also exist. Learning effects are cost savings that come from “learning by doing”.

Application of the New Trade Theory Typically, requires industries with high, fixed costs. World demand will support few competitors. Competitors may emerge because “they got there first”. First-mover advantage. Some argue that it generates government intervention and strategic trade policy.

First-Mover Advantage Economies of scale may preclude new entrants. Role of the government.