3.3.4 More recent theories
As noted in the previous section, Smith and Ricardo used only labour input: no consideration was given to producing goods with different combinations of factors. Not until 1933 did Ohlin, a Swedish economist building on work done by his compatriot Heckscher in 1919, develop the theory of factor endowment.
The Heckscher-Ohlin theory of factor endowment states that international and regional differences in production costs occur because of deficiencies in the supply of production factors. Those goods which require a large amount of the most abundant - and thus less costly - factor will have lower production costs, enabling them to be sold for less in international markets. Thus countries such as Australia and Canada which have large areas of land should emphasise agriculture and pastoral industry, whereas small land mass countries with capital, such as the Netherlands and Switzerland , should specialise in capital intensive products.
Although this theory holds in general, it does not explain export production that arises from taste differences rather than factor differences. Examples are French wine (with Tasmanian wines now making many inroads) and Italian leather goods which are valued for their flair, quality and prestige. Also, this theory does not account for transportation costs, nor for differences in the availability of technology.
An exception to the Heckscher-Ohlin theory was examined in 1953 by Leontief. He found that the capital-to-labour ratio for US exporting industries was lower than that of its import-competing industries. In other words, his results suggested that the US exported goods that were relatively labour intensive and imported commodities that were relatively capital intensive. Leontief argued that the US was two to three times more efficient than other countries. If the labour supply were adjusted to account for this efficiency, the US could be considered a labour-abundant nation. However, the US is also a capital-abundant nation.
The Leontief paradox has given rise to similar studies for other countries, with similar results.
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