Eastwood's ECO 486 page Solutions
1. Why were Leontief s findings considered to be paradoxical?
2. Suppose that the information below represents the complete trade data for each country. Use this data to calculate values of IIT for each country. Use formula 5.1 on page 137 to calculate the Grubel-Lloyd index of intraindustry trade.
| Exports | Imports | |
| Country A | ||
| Good X | $10000 | $5000 |
| Good Y | 8000 | 1000 |
| Good Z | 0 | 12000 |
| Country B | ||
| Good R | 5000 | 0 |
| Good S | 400 | 6000 |
| Good T | 0 | 12000 |
| Country B | ||
| Good M | 2000 | 1800 |
| Good N | 1000 | 1500 |
| Good O | 1500 | 1200 |
3. Discuss various reasons why we might expect countries to engage in intra-industry trade.
4. Explain carefully how Leontief went about testing the HO model. Why is this an incomplete test of the model?
5. Discuss the merits of the alternative reconciliations of Leontief's findings (by Leontief, Vanek, Travis & Linder). Why do you think so much effort was expended in trying to reconcile Leontief s findings with the HO model?
6. How else might the HO model be tested? (Hint: factor price equalization). What would you expect to find if you were to test this proposition with real world data? Would this necessarily refute the model?
7. Explain how each of the alternative models (Human skills, Product cycle, Similar preferences) of comparative advantage explains the Leontief Paradox.
8. Would the Linder hypothesis provide a convincing explanation for the pattern of international trade in wheat? in coal? Explain why or why not.