Exam 8: The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

Given the following diagram that shows the relationship between the price of good X relative to the price of good Y (P_X/P_Y) and the wage rate relative to the return to capital or rental rate on capital (w/r), and also indicates relative factor prices in country A [(w/r)_A], relative factor prices in country B [(w/r)_B], relative autarky goods prices in country A [(P_X/P_Y)_A], relative autarky goods prices in country B [(P_X/P_Y)_B], and (w/r) [where the (P_X/P_Y) associated with (w/r) is the highest (P_X/P_Y) on the graph]: At (w/r) values less than (w/r), is the relatively labor-intensive good and, at (w/r) values greater than (w/r), the relatively labor-intensive good.

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Question 1

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In the 2x2x2 Heckscher-Ohlin analysis, if an relatively labor-abundant country is opened To trade, then, as the movement to trade takes place, the capital/labor ratio used in the Country's export industry will and the capital/labor ratio used in the Country's import-competing industry .

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Question 2

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Carefully explain, for each of the following two statements, why the statement is either TRUE or FALSE. (a) "In a 2x2x2 Heckscher-Ohlin context, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import-competing industry decreases and the real return to capital in the export industry also decreases." (b) "In the 'specific-factors model,' with capital fixed in each sector, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import- competing industry decreases and the real return to capital in the export industry also decreases."

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Question 3

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(a) This statement is FALSE. In a 2x2x2 Heckscher-Ohlin context, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import-competing industry actually increases, while the real return to capital in the export industry decreases. This is because in a labor-abundant country, the relative abundance of labor compared to capital means that the return to capital will be higher in industries that are relatively more capital-intensive, such as the import-competing industry. On the other hand, the return to capital will be lower in industries that are relatively more labor-intensive, such as the export industry.

(b) This statement is TRUE. In the specific-factors model, with capital fixed in each sector, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import-competing industry decreases and the real return to capital in the export industry also decreases. This is because in the specific-factors model, factors of production are immobile between sectors, so when the country opens up to trade, the return to capital in both industries will decrease as the relatively more abundant factor (labor) gains from trade, while the relatively scarce factor (capital) loses out.

The "magnification effect" refers to the fact that, when a country is opened to trade,

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Question 4

Two of the strong assumptions underlying the H-O model are zero transportation costs and perfect competition. Explain how the presence of each might alter any of conclusions reached in the basic H-O approach.

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Question 5

Will the price definition of factor abundance produce the same conclusion as the physical definition of factor abundance in the presence of demand reversal? Why or why not?

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Question 6

In the context of the "specific-factors model," explain the income distribution impacts within a relatively labor-abundant country of a movement from autarky to a situation of free trade. How and why are these impacts at variance with the impacts that would occur according to the Stolper-Samuelson theorem? Carefully explain.

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Question 7

In the graph in Question #24 above, if the two countries are opened to trade with each other, country A will export and country B .

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Question 8

In the following diagram showing the relationship between the price of good X relative to the price of good (P_X/P_Y) and the wage rate relative to the return to capital or rental rate on capital (w/r), good X is the relatively good at (w/r) values less than (w/r), and good X is good at (w/r) values greater than (w/r). [Note: The (P_X/P_Y) associated with (w/r) is the highest (P_X/P_Y) on the graph.]

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Question 9

Suppose that we are in a two-factor, two-country world where the factors of production Are labor (L) and land (T), the returns to the factors are the wage rate (w) and the rental Rate on land (t), and the countries are country A and country B. In this situation, country A is land-abundant relative to country B by the physical definition of relative factor Abundance if , and country A is land-abundant relative to country B by the Price (or economic) definition if .

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Question 10

Will the gains from trade be larger or smaller if one of the factors is not mobile in production? Why? Demonstrate your conclusion graphically. Is it true that if neither factor is mobile the country will receive no gains from trade? Explain.

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Question 11

It has been argued that the effect of trade in goods and services has the same effect on factor income distribution in a country as would be the case if factors were completely mobile internationally. What is the reasoning behind this argument?

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Question 12

Explain how relative factor abundance can determine the nature of trade flows between countries, making certain to point out any needed assumptions. Then, state the Heckscher-Ohlin theorem and discuss at least two situations that could lead to contradictions to this theorem.

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Question 13

Which one of the following is NOT an assumption made in the standard 2x2x2 Heckscher-Ohlin analysis?

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Question 14

If a commodity is classified as "labor-intensive" at one set of relative factor prices but "capital-intensive" at another set of relative factor prices, this situation is known as

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Question 15

(a) Assume a two-country world with two factors of production (capital and labor) and two goods. In this context, state the Heckscher-Ohlin theorem. Then indicate the two definitions of relative factor abundance. In addition, spell out what is meant by the assumption that one good is always relatively capital-intensive in its production process and the other good is always relatively labor-intensive in its production process. (b) Illustrate and carefully explain the complications that are generated for the predictive ability of the Heckscher-Ohlin theorem regarding trade patterns when (i) the phenomenon of "demand reversal" exists and (ii) the phenomenon of "factor-intensity reversal" exists.

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Question 16

If good A costs $10 per unit in country A and $12 per unit in country B, and if transport costs between A and B for the good are $3 per unit, an economist would say that

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Question 17

If skilled labor is physically more abundant relative to unskilled labor in country I than in Country II, but yet skilled labor is relatively higher-priced in comparison to unskilled Labor in country I than in country II, this phenomenon could be accounted for by

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Question 18

Domestic pressures for trade protection appear to stem importantly from the expected income distribution effects of trade. What theorems or concepts would you use from this chapter to explain why we find both various labor groups and capital owners pressuring the U.S. Congress for trade protection? Explain.

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Question 19

Suppose that a firm is maximizing profit in its home market at output Q₁ and price P₁ in the following graph: If the firm now has the opportunity to sell overseas at given world price P₂ and the firm Can practice "dumping," which one of the following will NOT happen?

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Question 20

Showing 1 - 20 of 31

Exam 8: The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

The "magnification effect" refers to the fact that, when a country is opened to trade,

Two of the strong assumptions underlying the H-O model are zero transportation costs and perfect competition. Explain how the presence of each might alter any of conclusions reached in the basic H-O approach.

Will the price definition of factor abundance produce the same conclusion as the physical definition of factor abundance in the presence of demand reversal? Why or why not?

In the graph in Question #24 above, if the two countries are opened to trade with each other, country A will export __________ and country B __________.

Will the gains from trade be larger or smaller if one of the factors is not mobile in production? Why? Demonstrate your conclusion graphically. Is it true that if neither factor is mobile the country will receive no gains from trade? Explain.

It has been argued that the effect of trade in goods and services has the same effect on factor income distribution in a country as would be the case if factors were completely mobile internationally. What is the reasoning behind this argument?

Explain how relative factor abundance can determine the nature of trade flows between countries, making certain to point out any needed assumptions. Then, state the Heckscher-Ohlin theorem and discuss at least two situations that could lead to contradictions to this theorem.

Which one of the following is NOT an assumption made in the standard 2x2x2 Heckscher-Ohlin analysis?

If a commodity is classified as "labor-intensive" at one set of relative factor prices but "capital-intensive" at another set of relative factor prices, this situation is known as

If good A costs $10 per unit in country A and $12 per unit in country B, and if transport costs between A and B for the good are $3 per unit, an economist would say that

If skilled labor is physically more abundant relative to unskilled labor in country I than in Country II, but yet skilled labor is relatively higher-priced in comparison to unskilled Labor in country I than in country II, this phenomenon could be accounted for by

Suppose that a firm is maximizing profit in its home market at output Q1 and price P1 in the following graph: If the firm now has the opportunity to sell overseas at given world price P2 and the firm Can practice "dumping," which one of the following will NOT happen?

Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo

The Classical World of David Ricardo and Comparative Advantage

Extensions and Tests of the Classical Model of Trade

Introduction to Neoclassical Trade Theory: Tools to Be Employed

Gains From Trade in Neoclassical Theory

Offer Curves and the Terms of Trade

Empirical Tests of the Factor Endowments Approach

Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Economic Growth and International Trade

International Factor Movements

The Instruments of Trade Policy

The Impact of Trade Policies

Arguments for Interventionist Trade Policies

Political Economy and Us Trade Policy

Economic Integration

International Trade and the Developing Countries

The Balance-Of-Payments Accounts

The Foreign Exchange Market

International Financial Markets and Instruments: an Introduction

The Monetary and Portfolio Balance Approaches to External Balance

Price Adjustments and Balance-Of-Payments Disequilibrium

National Income and the Current Account

Economic Policy in the Open Economy Under Fixed Exchange Rates

Economic Policy in the Open Economy Under Flexible Exchange Rates

Prices and Output in the Open Economy: Aggregate Supply and Demand

Fixed or Flexible Exchange Rates

The International Monetary System: Past, Present, and Future

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In the graph in Question #24 above, if the two countries are opened to trade with each other, country A will export and country B .

Suppose that a firm is maximizing profit in its home market at output Q₁ and price P₁ in the following graph: If the firm now has the opportunity to sell overseas at given world price P₂ and the firm Can practice "dumping," which one of the following will NOT happen?