By Robert C. Feenstra
Modern and extremely transparent presentation of the mainstream concept of overseas exchange.
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Additional resources for Advanced International Trade: Theory and Evidence
And in the second column we show the capital and labor embodied in consumption. Taking the ratio of these, it is indeed the case that the capital/labor ratio embodied in production exceeds that in consumption. S. in 1947, contrary to what Leontief concluded. Thus, there was no paradox after all! It is useful to see the HOV Theorem and Leamer’s result in a diagram. 3, the w 1 2 length of the horizontal axis is the world labor endowment L = L +L , and the length of the w 1 2 vertical axis is the world capital endowment K = K +K .
Various writers after Baldwin have redone the type of regression shown above, with mixed results: sometimes the capital coefficient is positive, but other times it is again negative (see the survey by Deardorff, 1984a). What are we to make of these results? Well, as we argued for Leontief’s original paradox, it can be questioned whether Baldwin’s approach is a valid test i -1 of the HOV model. 4), a valid test would be to regress T on A , but instead, Baldwin i regressed T on A' . 1). Thus, we see that βˆ is a contaminated estimate of the vector of relative factor i i w endowments (V – s V ).
This means that not only does industry 1 absorb the entire amount of the extra labor endowment, it also absorbs further labor and capital from industry 2 so that its ultimate labor/capital ratio is unchanged from before. The labor/capital ratio in industry 2 is also unchanged, and this is what permits both industries to pay exactly the same factor prices as they did before the change in endowments. ”13 This refers to the discovery of oil off the coast of the Netherlands, which led to an increase in industries making use of this resource.
Advanced International Trade: Theory and Evidence by Robert C. Feenstra