ECON 2610 Lecture Notes - Lecture 7: Leontief Paradox, Pepsi Center

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Week 7 Notes
Leontief Paradox:
Post WWII, attempts were made to test the “new” theory. The only reliable data available
was from the US.
The assumption:
The US is relatively Kapital abundant and should therefore export Kapital
intensive goods.
Test results:
US exports were found to be more labor intensive than imports,
(they should be more capital intensive.)
Sector Specific Factors Model:
If you make $80,000, you must generate at least that amount for the firm
VMP = wages
If wages are high enough, labor will move
Inputs capital cannot move though
o C vs. F capital for each is fixed
o )f you want to produce more F, you can’t hire more capital, but you
can offer higher wages in order to produce more
VMPx VMPy
A
B
Wnew
W W
VMP’x
VMPy VMPx
LX LY
0Lx L* L*new 0Ly
VMP’x is )TOT EX: /
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