Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis: Comment

i. This is a second report on the progress of a continuing investigation into the structural basis of the trade relationships between the United States and the rest of the world. The first report published two years ago 1 elicited a number of critical comments.2 Some of these are, I hope, at least partly answered by the results of the additional and more comprehensive analysis which I present here. No reasonably conclusive replies to others can, however, be given without a much deeper and wider factual inquiry. The classical theory of comparative costs, in its -modernized version which explicitly allows for the existence of more than one scarce primary resource, makes up the formal background of the entire study. ;, For a full-fledged application of a general equilibrium approach to the explanation of the level and composition of the trade between this country and the rest of the world, we would have to possess concrete quantitative information about (i) the endowment of each of the trading countries with the so-called primary factors of production; (2) the shapes of the production functions, i.e., of the input-output relationships which govern in each country the transformation of these primary resources into various goods and services; and, last but not least (3) preferences determining in each area the choice among alternative bundles of finished commodities which it could actually attain through alternative combinations of domestic production and foreign trade. Such wealth of data, of course, we do not yet possess. The information collected in the last ten years within the framework of the systematic input-output studies of the American economy lays bare, however, at least one aspect of the hitherto almost entirely concealed structure -that part of it which can be seen when viewed from the side of one of the trading countries, the United States. The formal setting of the problem can be elucidated by a schematic diagram (Chart i). It describes a situation involving two countries, two primary factors of production, and two commodities. Fixed amounts of the two factors of production are required per unit of output of each commodity. These amounts referred to also as "'technical coefficients" are not assumed to be the same in both countries. As a matter of fact, the primary factors available and actually used in one of tfiem might be entirely different from those employed in the other. The "final demand" functions are, however, taken to be identical in both areas, and by analogy with the production functions they are described in terms of a given fixed proportion between the amounts in which the two finished commodities are to be consumed. The similarity of the two demand functions is assumed only to simplify the graphic presentation. It is not essential to the basic argument.3 The upper-right-hand quadrant of the adjoining figure depicts the situation in Country I. The output of Good X is measured from * The present study was conducted as part of the research program of the Harvard Economic Research Project. Miss Marie McCarthy and Miss Charlotte Taskier, staff members of the Project, were in charge of the statistical and computational work. 1 "Domestic Production and Foreign Trade; The American Capital Position Re-Examined," Proceedings of the American Philosophical Society, 97 (September I953). Also reprinted in Economia Internazionale, vii (I954). 2p. T. Ellsworth, "The Structure of American Foreign Trade: A New View Examined"; Boris Swerling, "Capital Shortage and Labor Surplus in the United States? " -both published in this REVIEW, XXXVI (August 1954). Stefan Valavanis-Vail, "Leontief's Scarce Factor Paradox," Journal of Political Economy, LXII (December I954). Gustaaf F. Loeb, "A Estrutura Do Comercio Exterior Da America Do Norte," Revista Brasileira De Economia, 8 (December I954). David Granick, "The American Capital Position in Foreign Trade: A Comment," Southern Economic Journal, xxii (October 1955). Norman S. Buchanan, "Lines on the Leontief Paradox," Economia Internazionale, viII (I955). 'An algebraic formulation of the model, generalized for any number of commodites and factors, is presented in Appendix I.