Page 62 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Leontief’s study showed that the US exports consisted of labour-intensive goods and the imports, (or
more precisely import competing products) consisted of capital-intensive goods. In Leontief’s own
words, “America’s participation in division of labour in international trade is based on its specialization
in labour intensive rather than capital-intensive lines of production. In other words, the country
resorts to foreign trade in order to economize its capital and dispose of its surplus labour, rather than
vice versa”. Leontief’s findings are summarized in the following table :

Exports Imports
Replacements

Capital (US $ in 1947 prices) 2,550,780 3,091,339
Labour (man years) 1,80,313 1,70,004
Capital Labour ratio (US $ per man hour) 13,911 18,185

From the above table, it is obvious that the US exports had a lower capital-labour ratio than the
import replacements. Note carefully that these are import replacements produced in the United States
as opposed to the actually imported goods in that country. This distinction is important as we will
see later.
Leontief’s paradoxical results stimulated similar studies for other countries. Two Japanese economists
found that Japan’s exports embodied more capital and less labour than Japan’s import competing
goods. Since Japan is a relatively labour-abundant country, this conclusion is inconsistent with the
Heckscher-Ohlin prediction. Similarly, an examination of Canada’s trade with the United States
revealed that Canada’s exports were capital intensive and imports labour intensive. This, again, is
not in accordance with the Heckscher-Ohlin theory. Furthermore, an investigation of India’s trade
with the United States discovered exports to be capital-intensive and imports labour-intensive.
Considering that India is an extremely labour surplus country, the result is a paradox. Finally, a
study of East Germany’s trade showed her exports to be capital intensive and imports labour-intensive.
East Germany is not really a capital surplus country, this is also a paradoxial result.

4.3 Kravis and Linder Theory of Trade
Non-availability Approach (Kravis Theory of Trade)

The non-availability explains international trade by the fact that each country imports the goods
that are not available at home. This unavailability may be due to lack of natural resources (oil, gold,
etc. : this is absolute unavailability) or to the fact that the goods cannot be produced domestically, or
could only be produced at prohibitive costs (for technological or other reasons) : this is relative
unavailability. On the other hand, each country exports the goods that are available at home.
As regards the presence or absence of natural resources this aspect could easily be fitted into the
Heckscher-Ohlin model that stresses the differences in relative endowments. A generalized version
of the model can be used by adding a factor natural resources.
The originality of this approach lies in its second aspect, that is, in the reasons put forward to explain
international differences in relative availability. Essentially there are two reasons : technical progress
and product differentiation.
As regards the first reason, Kravis observes that the stimulus to exports provided by technological
change is not confined to the reduction costs but also includes the advantages deriving form the
possession of completely new products and of the most recent improvements of existing types of
goods. In such cases the operation of the demonstration effect of Duesenberry (1949) creates an almost
instantaneous demand abroad for the products of the innovating country and thus generates
international trade.
As regards product differentation, the idea of Kravis is to extend to international trade the results of the
theory of monopolistic competition. Different countries produce similar commodities or, more exactly,

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