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Leontief's Paradox was the study done be Leontief where he found that even though the United States was abundant in capital, they were exporting labor intensive goods rather than capital intensive. In other words, the capital to labor ratio was higher for imports than for the United States' exports. This was against was the Heckscher-Ohlin theorem predicted. However, Leontief's paradox was explained to show why this occurred. First, he did not differentiate between skilled and unskilled labor. The U.S. is abundant in skilled labor, so that is why they were exporting labor intensive goods. It was very important to learn about the effective factors approach from Leontief's paradox. The effective factor endowment is the actual amount of a factor found in a country times its productivity. A country may have less in terms of actual number of a factor, but the productivity of that factor could be so high that it makes the country abundant in it. This helped solve the paradox because Leontief did not know that the U.S. was abundant in skilled labor which explained the whole paradox.
More so, Leontief did not take into account that technologies are not the same across countries, that there is not total free trade around the world (which means there are transportation costs), and that some goods which may be capital intensive in the U.S. may actually be labor intensive in another country.
The explanation of Leontief's paradox was an important find for international trade because now looking at effective factor endowments is critical to finding whether a country is abundant or scarce in a factor.
The three original pillars of the GATT treaty were multilateralism, reciprocity, and nondiscrimination. The fourth pillar that was later added was the safety valves (escape clauses). The WTO added the transparency and enforceability/dispute resolution pillars. Multilateralism refers to how countries set rules and agreements (treaties) between other various countries/governments/states in regards to laws (it cover items such as international trade, human rights, and international transportation). Reciprocity is how prices are stabilized between economies and countries will have set prices they charge each other. Nondiscrimination refers to how countries buy and sell products equally and fairly to and with other countries and cannot refuse to buy or sell products in a discriminatory fashion. Safety valves describes how a country might need to change their commitment to a trade agreement due to an unforeseen circumstances, so it allows them to escape the agreement. Transparency is how members of the organization put faith into the other members by disclosing information necessary to monitor the actions of trade. Enforceability and dispute resolution is how the members of the organization choose to settle disputes, which is to use an agreement method of enforceability rather than unilaterally acting.
The prisoners' dilemma is when people act in their own self-interest, which leads to them not producing the optimal outcome. In terms of trade, the prisoners' dilemma of trade policy is how countries who have market power can create beggar-thy-neighbor tariffs when these countries do not have agreements that control the amount of the tariffs they levy. As we saw in class, there is a Nash equilibrium, where countries are able to each gain $5 billion (lower right of the table), but because of their own self-interests, the countries end up only gaining $1 billion. The GATT and WTO can help stop this prisoners' dilemma. These pillars help "solve" the prisoners' dilemma of trade policy because the pillar of reciprocity forces the countries to act the same way in terms of tariffs against each other. Therefore, countries have reciprocal policy actions, so they do not need to worry about another country choosing something that solely benefits their own country. Instead, countries can work together to find the best outcome for all.