Trade Imbalance

     Leontief's data show that US exports in 1947 amounted to $16,678 million and imports were $6,177 million. GNP of the US that year was $198,688 million. Thus, trade surplus was more than 5% of national income.

          The HO theory based on the assumption that trade is balanced. To predict the trade pattern when trade is not balanced, much more information might be necessary. In general, in the presence of trade imbalance, a capital abundant country may not export capital-intensive goods. With a trade surplus, a capital abundant country such as the US may not only export the capital- intensive goods but also the labor-intensive goods.

          Suppose that there are three goods, 1, 2, and 3, so that k₁ > k₂ > k₃.

          Assume further that when trade is balanced, the US exports good 1 and imports 2 and 3. Then this trade pattern would be consistent with the HO theory.

          Suppose now that the US is maintaining a large trade surplus. This trade surplus means that US consumers must reduce consumption of all three goods proportionately (due to homothetic preferences). In the presence of a large trade surplus, it is possible for the US to export the most labor-intensive good. That is, the US may export 1 and 3 and import 2.

          In this case, the average capital-labor ratio of the exports (1 and 3) can be lower than that in imports and a Leontief paradox occurs.

Balanced Trade

Industries	ki	Production	Consumption	Export
1	2	400	200	200
2	1	50	200	-150
3	0.5	150	200	-50

Trade Surplus

Industries	ki	Production	Consumption	Export
1	2	400	100	300
2	1	50	100	-50
3	0.5	150	100	50

k_x = (300 K₁ + 50K₃)/(300 L₁ + 50L₃) > or < 1 = k_m = k₂

Q: had trade been balanced in 1947, would the US have exported capital-intensive goods and imported labor-intensive goods?

          Among the 38 industries examined by Leontief, only three industries were importers in 1947. In the remaining 35 industries, the US was an exporter. Casas and Choi (1984) computed the trade pattern that would have prevailed had trade been balanced in 1947. They concluded that the US would have exported capital-intensive goods in the balanced trade situation. That is, US exports would have been more capital-intensive than US imports.

k_x = $12,338 per man year

k_m = $11,231 per man year