Exam 4: Trade: Factor Availability and Factor Proportions Are Key

The difference between the Heckscher-Ohlin theory of trade and the Ricardian model is that the former assumes that an economy produces only two goods.

The table given below shows the units of land and labor required to produce a unit of bread and cheese respectively in country X. If country X is a relatively land-abundant country, the opening up of free trade would cause the price of bread relative to cheese to: 1 urit of Bread 1 unit of Cheese Labor Input 5 units 20 units Land Input 4 units 10 units

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW (K/L)_automobiles > (K/L)_shoes Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. This information indicates that the United States:

In the absence of trade, a country produces at a point where its production-possibility curve is tangent to the highest possible community indifference curve.

The table given below shows the units of land and labor required to produce a unit of bread and cheese respectively in country X. If country X is land-abundant, the opening up of free trade would result in: 1 urit of Bread 1 unit of Cheese Labor Input 5 units 20 units Land Input 4 units 10 units

If country A is relatively abundant in labor and country B is relatively abundant in capital, the Heckscher-Ohlin theory predicts that country A will export relatively labor-intensive goods and country B will export relatively capital-intensive goods.

According to the Heckscher-Ohlin theory, if the proportion of labor to capital in a country is greater than the proportion of labor to capital in the rest of the world, we can conclude that the country is labor abundant and will have a comparative advantage in the production of goods that use labor intensively.

Using the concepts of community indifference curves and production-possibility curve, explain how the international price of a good is determined in the Heckscher-Ohlin two-goods model. What is the unit of measurement for the price of a good in this model?

The figure given below shows the post-trade production and consumption points in country Y. AB is the production-possibility curve of country Y. I₁ is the community indifference curve of country Y. Country Y imports:

Explain the differences between the two-country two-good model with constant costs of production and the model with increasing costs of production. Adequately describe the production possibilities curves for each country in each case. Describe free-trade production and the degree of specialization in each country under both cost situations.

If country A is relatively land-abundant and country B is relatively labor-abundant, the Heckscher-Ohlin theory predicts that country A will export textiles (a relatively labor-intensive good) and country B will export corn (a relatively land-intensive good).

Assume a two-country, two-good, and two inputs model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the Rest of the World would:

An indifference curve shows the various consumption bundles that result in the same level of well-being for an individual.

When increasing amounts of a variable factor are added to a fixed factor, the output increases but at a diminishing rate.

Country Y has 15 thousand acres of land and 45 thousand laborers, whereas the Rest of the World has 100 thousand acres of land and 200 thousand laborers. These countries produce a labor-intensive good A, and a land-intensive good B. When trade opens up between these countries, it can be inferred that country Y will:

The production-possibility curve illustrates the consumption preferences of a country's population, and explains why all people prefer to be employed rather than unemployed.

Assume a two-country, two-good, and two-input model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the United States would:

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW (K/L)_automobiles > (K/L)_shoes Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. If trade opens up between the United States and the Rest of the World, according to the Heckscher-Ohlin model, the United States will export _____ and import _____.

Which of the following economists proposed an international trade model that explains international trade patterns using factor proportions?

Which of the following best explains why increasing marginal costs of production arise?