Project 2 will consist of an application of the theory of comparative advantage

Question

Project 2 will consist of an application of the theory of comparative advantage as augmented by endowment theory. In your report, consider the economic inventory of the USA and use that inventory to predict the top 3 items the country is likely to export. Should the exports be labor or capital intensive? Why? Conclude your report with an empirical test of your hypothesis. What are the top 3 exports of the USA. Are they labor or capital intensive at all? Did this information match your prediction? The document should be doubled-spaced, and should be between 800-1000 words of core content (approximately 3-4 pages, excluding title page and references.)

Explanation / Answer

According to the famous economists Heckscher and Ohlin a country will export those goods which it produces by making use of its such factor of production which is available in abundant. For eg a country which has labor in abundant will indulge in exporting labor intensive goods and import of capital intensive goods since it is scarce in the country. This is because the countries function on the basis of comparative advantage. Any country involves itself in export in order to earn profit so will export those goods which can be made in a cheaper way. But in the year 1951 Wassily Leontief found that USA which is the actually a capital intensive country exported labor intensive products and imported capital intensive commodities. This behavior was completely in contradiction to the theory of Heckscher and Ohlin. But if labor is bifurcated in two parts as skilled and unskilled then it was observed that USA exported skilled labor intensive goods and imported the unskilled labor intensive goods which was much accurate for the theory of Heckscher and Ohlin.    

Leontief further gave more explanations stating that the exports of US contain more human capital and so were productive. Later Peter Kenen conducted a study and found that if human capital and physical capital were combined together it formed the total capital which meant that US exports were capital intensive which was as per the Heckscher and Ohlin model. Leontief also gave one more explanation according to which he explained that a country’s endowment to natural resources could not be ignored at any given point since the labor and capital intensive techniques very well depended on the availability of natural resources.

Thus the comparative advantages exist due to the different factor endowments of the countries.

The top 3 exports of US are:-

All these items are a mixture of labor and capital intensive

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.