Leontief Paradox vs. Leontief Trade and Localized Factor Prices vs. Localized Trade Patterns

Abstract

Effective endowments and virtual endowments are insightful ideas to incorporate different technologies with the Heckscher-Ohlin-Vanek framework. This study shows that trade patterns are localized when countries have different technologies, while factor prices are non-equalized (or localized). The Leontief paradox is a localized trade phenomenon or pattern conceptually. It demonstrates that both effective endowments and virtual endowments can explain and present the trade pattern observed in the Leontief test. The core idea of the effective endowment (and the virtual endowment) is that a country exports its effective-abundant factor referred to by its productivity. This paper illustrates that the Leontief paradox arises naturally if a country’s actual factor abundance is inconsistent with its effective factor abundance. The study presents the price-trade equilibrium with non-equalized factor prices to help view trade patterns as trade consequences. The study shows that the Leontief paradox phenomenon may occur even in the absence of factor intensity reversal. The study proposes the factor price definition of trade patterns that mirrors trade patterns defined by factor abundances.