Answer to Question 1
As foreign exchange trading expanded, financial markets in different countries became more tightly integrated, an important step towards the creation of today's worldwide foreign exchange market. With growing opportunities to move funds across borders, national interest rates became more closely linked and the speed with which policy changes might cause a country to lose or gain international reserves increased.
Answer to Question 2
There are many possible answers. They may be classified into three groups. One would argue that the model, or theory is wrong. The second would argue that the theory is correct (internally consistent and descriptive of real world data), but the real world data is incorrectly perceived, defined or measured. The third would argue that the statement itself is wrong, and that in fact the Leontief paradox itself is not actually observed, but rather is due to faulty logical rendering of the original model. Empirical studies conducted since Leontief's work was published suggest that, by relaxing the model's restrictive assumptions regarding technology, goods, and trade costs, evidence in support of the HO model was strengthened and evidence of the Leontief effect was diminished.
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