An Investigation of the Leontief Paradox using Canadian Agriculture and Food Trade: An Input-Output Approach Tingting Wu Department of Natural Resource Sciences (Agricultural Economics) McGill University, Montreal August, 2011 A thesis submitted to McGill University in partial fulfillment of the requirements of the degree of Master of Science © Tingting Wu, 2011 TABLE OF CONTENT ABSTRACT ...................................................................................................................... V RÉSUMÉ ....................................................................................................................... VII ACKNOWLEDGEMENTS ........................................................................................ VIII CHAPTER 1: INTRODUCTION .................................................................................... 1 1.1 TRADE THEORIES ............................................................................................. 1 1.2 THE LEONTIEF PARADOX ................................................................................. 2 1.3 THE INPUT-OUTPUT MODEL ............................................................................. 3 1.4 CANADIAN TRADE ............................................................................................ 3 1.4.1 Canada’s trading partners ...................................................................... 4 1.4.2 Agriculture trade in Canada ................................................................... 7 1.5 PROBLEM STATEMENT AND OBJECTIVES .......................................................... 8 1.6 ORGANIZATION OF THE RESEARCH ................................................................ 10 CHAPTER 2: LITERATURE REVIEW ..................................................................... 11 2.1 TRADE THEORIES ........................................................................................... 11 2.2 LEONTIEF PARADOX AND ITS DEVELOPMENT ................................................. 13 2.2.1 The Leontief Paradox ............................................................................ 14 2.2.2 Leontief’s interpretation ....................................................................... 15 2.2.3 Observation of the Leontief Paradox in other studies and possible explanations .............................................................................................................. .16 2.2.4 Refuting of the Leontief Paradox .......................................................... 22 2.2.5 Other studies on the Leontief Paradox ................................................. 25 2.2.6 Investigation of the Leontief Paradox in other countries ..................... 27 2.3 CONCLUSION .................................................................................................. 29 CHAPTER 3: METHODS AND PROCEDURES ....................................................... 30 3.1 THE INPUT-OUTPUT MODEL .......................................................................... 30 3.1.1 The Leontief Input-Output Model ......................................................... 30 3.1.2 The Canadian Input-Output Model ....................................................... 32 3.2 THE MODIFIED INPUT-OUTPUT MODEL ........................................................... 37 3.3 THE ACCURACY OF THE MODIFIED INPUT-OUTPUT MODEL ............................. 40 3.3.1 Procedure .............................................................................................. 40 3.4 TESTING OF THE LEONTIEF PARADOX ON CANADIAN AGRICULTURE AND PROCESSED FOOD TRADE .................................................................................................... 43 3.4.1 Leontief’s Approach ............................................................................. 44 3.4.2 Leamer’s computation ......................................................................... 45 3.4.3 The production factors .......................................................................... 46 CHAPTER 4: RESULTS AND DISCUSSION ............................................................ 52 4.1 TESTING THE MODIFIED INPUT-OUTPUT MODEL ............................................. 52 4.1.1 Shock by the total Domestic Final Demand .......................................... 52 4.1.2 The Industrial Output impacts from the domestic final demand in agriculture and food commodities .................................................................................... 61 4.1.3 Discussion ............................................................................................. 68 i 4.2 EXAMINATION OF THE LEONTIEF PARADOX ................................................... 69 4.2.1 The Canadian agriculture and food trade in 2006 ............................... 69 4.2.2 Applying Leontief’s approach ............................................................... 71 4.2.3 Applying Leamer’s approach ................................................................ 75 4.2.4 Discussion and conclusion .................................................................... 78 CHAPTER 5: CONCLUSION....................................................................................... 82 5.1. RECOMMENDATION FOR FURTHER RESEARCH ...................................................... 85 REFERENCES ................................................................................................................ 87 APPENDIX A: LIST OF INDUSTRIAL SECTORS IN THE MODIFIED INPUT- OUTPUT MODEL AND THEIR LEVELS OF AGGREGATION ........................... 91 APPENDIX B: LIST OF COMMODITIES, SERVICES, AND PRIMARY INPUTS IN THE MODIFIED INPUT-OUTPUT MODEL AND THEIR LEVELS OF AGGREGATION ............................................................................................................ 94 APPENDIX C: ONE MILLION DOLLAR SHOCK TO CANADIAN AGRICULTURE AND PROCESSED FOOD EXPORTS AND IMPORT REPLACEMENTS AT THEIR BASIC PRICE ........................................................ 100 APPENDIX D: THE CAPITAL AND LABOUR COEFFICIENTS BY INDUSTRIAL SECTOR .............................................................................................. 103 APPENDIX E: INDUSTRIAL OUTPUT REQUIREMENTS TO SATISFY $1 MILLION DOLLAR EXPORTS AND IMPORT REPLACEMENTS ................... 107 ii LIST OF TABLES TABLE 3-1. THE ACCOUNTING FRAMEWORK OF CANADIAN INPUT-OUTPUT TABLES ........ 33 TABLE 3-2. AGGREGATION DIMENSIONS FOR INPUT-OUTPUT TABLES ............................... 36 TABLE 3-3. AGRICULTURE AND PROCESSED FOOD SECTORS IN THE MODIFIED INPUT- OUTPUT MODEL ......................................................................................................... 39 TABLE 3-4. COMMODITIES EXCLUDED FROM THE SHOCK ................................................... 41 TABLE 3-5. ASSETS BY FARM TYPE (MILLION DOLLARS).................................................... 47 TABLE 3-6. A COMPARISON BETWEEN THE KLEMS CAPITAL STOCK VALUE AND THE VALUE OF TOTAL ASSETS IN THE CANADIAN FARM FINANCIAL DATABASE ........................... 48 TABLE 3-7. TOTAL PAYMENT OF WAGES AND SALARIES BY SELECTED AGRICULTURAL SECTORS ..................................................................................................................... 49 TABLE 3-8. TOTAL AREA OF FARM (ACRES) ....................................................................... 50 TABLE 3-9. LAND COEFFICIENTS BY SELECTED SECTORS ................................................... 51 TABLE 4-1. THE DOMESTIC FINAL DEMAND BY COMMODITIES AND SERVICES AT THE SMALL LEVEL OF AGGREGATION IN BASIC PRICE .................................................................... 54 TABLE 4-2. TOP 10 INDUSTRIAL SECTORS AT THE SMALL LEVEL OF AGGREGATION WITH THE LARGEST INCREASE IN INDUSTRIAL OUTPUT ............................................................... 57 TABLE 4-3. COMPARISON OF TOTAL DOMESTIC DEMAND AND ITS IMPACT ON THE INDUSTRIAL OUTPUT .................................................................................................. 59 TABLE 4-4. THE TOP 5 DOMESTIC FINAL DEMAND FOR AGRICULTURE AND FOOD COMMODITIES ............................................................................................................ 62 TABLE 4-5. THE TOTAL INDUSTRIAL OUTPUT REQUIRED TO SATISFY THE DOMESTIC FINAL DEMAND FOR AGRICULTURE AND FOOD COMMODITIES (MILLION DOLLARS) .............. 63 iii TABLE 4-6. COMPARISON OF INDUSTRIAL OUTPUT FROM THE AGRICULTURE AND PROCESSED FOOD SECTORS REQUIRED TO SATISFY THE DOMESTIC FINAL DEMAND FOR AGRICULTURE AND FOOD COMMODITIES .................................................................... 67 TABLE 4-7. DOMESTIC CAPITAL, LABOUR AND LAND REQUIREMENTS PER MILLION DOLLARS OF CANADIAN AGRICULTURE AND FOOD EXPORTS AND IMPORT REPLACEMENTS ....... 73 TABLE 4-8. FACTOR REQUIREMENTS FOR AGRICULTURE AND PROCESSED FOOD TRADE .... 76 TABLE 4-9. FACTOR CONTENT IN TOTAL AGRICULTURAL PRODUCTION, CONSUMPTION AND NET-EXPORTS IN 2006 ................................................................................................ 77 iv LIST OF FIGURES FIGURE 1-1. EXPORTS AND IMPORTS OF GOODS AND SERVICES ............................................ 4 FIGURE 1-2.EXPORTS BY PARTNER ...................................................................................... 5 FIGURE 1-3. IMPORTS BY PARTNER ...................................................................................... 6 FIGURE 1-4. EXPORTS OF GOODS AND SERVICES BY CATEGORY ........................................... 8 v Abstract This study investigated whether the