Solving Leontief's Paradox with Endogenous Growth Theory

George Sorg-Langhans, Clemens C. Struck and Adnan Velic

No 201819, Working Papers from School of Economics, University College Dublin

Abstract: Theories of international trade have severe difficulties in explaining why, despite i) substantial differences in factor-proportions across industries and ii) considerable cross-country differences in capital-labor ratios, the iii) the evidence for factor-proportions trade is rather weak. We propose a simple explanation of this well known finding: standard trade theories treat important forces such as the distribution of productivity within the economy as exogenous. We argue instead that the productivity allocation is endogenous and counter-balances factor-proportion differentials be- tween countries. Consequently, comparative advantage across countries of different development levels is negligible and this is why the incentives for trade are low.

Keywords: Factor-proportions trade; Heckscher-Ohlin-Vanek; Macroeconomic general equilibrium models; Endogenous growth; Biased productivity (search for similar items in EconPapers)
JEL-codes: F11 F14 F41 O47 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2018-11
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201819

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