Deck 5: Who Gains and Who Loses From Trade

Question 1

Let us assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short-run, but lose in the long-run, from the opening of trade?

A)Domestic landowners in the farming sector
B)Domestic landowners in the cloth-making sector
C)Foreign landowners in the farming sector
D)Foreign workers in the cloth-making sector

Answer 1

B

Question 2

The theory which predicts that trade occurs because of differences in the availability of inputs across countries and the differences in the proportions in which the inputs are used in producing different products is called:

A)the Stolper-Samuelson theory.
B)the Heckscher-Ohlin theory.
C)the theory of comparative advantage.
D)the theory of absolute advantage.

Answer 2

B

Question 3

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. According to H-O theory, country A has a comparative advantage in the production of: $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$

A)both bread and wine.
B)neither bread nor wine.
C)wine.
D)bread.

Answer 3

wine.

Question 4

With free trade, if country X is relatively labor abundant and relatively land scarce and country Y is relatively labor scarce and relatively land abundant, the factor-price equalization theorem predicts that:

A)rents will rise in country X and fall in country Y until they equalize.
B)wages will rise in country X and fall in country Y until they equalize.
C)rents will fall in country Y but will remain unchanged in country X.
D)wages will increase in country Y but will remain unchanged in country X.

Question 5

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$ Following the opening of trade, Country A would probably:

A)export both bread and wine.
B)export wine and import bread.
C)import both the goods.
D)export bread and import wine.

Question 6

The Stolper-Samuelson theorem indicates that given certain assumptions and conditions:

A)the real return to the factor used intensively in the import-competing industry will rise in the long-run.
B)the real return to the factor used intensively in the export industry will fall in the long-run.
C)the real return to all the resources in an economy will increase.
D)the real return to the factor used intensively in the export industry will rise in the long-run.

Question 7

According to the Stolper-Samuelson theorem, a price change that reduces a country's production of its exportable product would:

A)reduce the returns to all factors of production within the country.
B)raise the returns to all factors of production within the country.
C)reduce the returns to the factor of production used intensively in the export industry.
D)raise the returns to the factor of production used intensively in the export industry.

Question 8

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$ Which of the following is most likely to happen if country A engages in free trade with other countries?

A)The prices of both bread and wine will fall in the domestic market.
B)The price of bread will fall but the price of wine will rise in the domestic market.
C)The prices of both bread and wine will rise in the domestic market.
D)The price of bread will rise but the price of wine will fall in the domestic market.

Question 9

In the short-run, following the opening of trade:

A)workers in the country can change jobs but will receive the same wage.
B)workers will suffer from lower wages but land owners will benefit from higher rents.
C)all groups tied to declining sectors of the economy will suffer from lower returns.
D)gross output remains constant.

Question 10

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. Based on this information, which of the following statements is true? $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$

A)The inputs are used in the same proportion in the production of both the goods.
B)Bread is a relatively capital-intensive good.
C)Wine is a relatively capital-intensive good.
D)In the absence of trade, the wage rate is lower than the rental rate of capital in this country.

Question 11

According to the factor-price-equalization theorem, free trade between any two countries equalizes:

A)product prices as well as the prices of individual factors of production between the countries.
B)product prices between the countries but not the prices of individual factors of production.
C)product prices between the countries and factor prices within each country but not between the countries.
D)product prices and factor prices within each country but not between the countries.

Question 12

Country A is relatively land-abundant and wheat is relatively land-intensive. Given the assumptions of the Heckscher-Ohlin model, the opening of trade in this country will cause the domestic price of wheat to:

A)fall.
B)rise.
C)remain unaffected.
D)at first rise but then fall back to its original level.

Question 13

If trade corresponds to the Heckscher-Ohlin theory, which of the following is most likely to happen in the long run after a labor-abundant country engages in free trade?

A)The rate of unemployment in the country is most likely to increase.
B)The total output in the economy will decline.
C)The capital to labor ratio in the export sector will increase.
D)The rental rates of capital will increase but the wage rates will decline.

Question 14

Which of the following statements is true?

A)Free trade causes contraction of the export-oriented sector.
B)Free trade causes contraction in the import-competing sector.
C)Free trade restricts consumption choices of the domestic consumers.
D)All the domestic producers benefit when a country engages in free trade.

Question 15

The Stolper-Samuelson theorem predicts that free trade between the United States, a capital-abundant country, and Mexico, a labor-abundant country, would ultimately result in:

A)higher wages in both countries.
B)lower wages in both countries.
C)higher wages in Mexico and lower wages in the United States.
D)lower wages in Mexico and higher wages in the United States.

Question 16

The factor-price-equalization theorem tells us that free trade between two countries should result in:

A)all workers in the two countries earning the same wage rate.
B)all workers in the two countries having the same skill level.
C)all workers of the same skill level earning the same wage rate in the two countries.
D)all input prices being equal within each country.

Question 17

According to the Stolper-Samuelson theorem, an increase in the price of a country's imports will:

A)reduce the returns to all factors of production within the country.
B)raise the returns to all factors of production within the country.
C)reduce the returns to the factor of production used relatively intensively in the import-competing industry.
D)raise the returns to the factor of production used intensively in the import-competing industry.

Question 18

In the short-run, following the opening of trade:

A)inputs move across sectors, but input returns remain constant.
B)factor payments in the import-competing sectors will decline.
C)the supply of resources to the export-oriented sectors will decline.
D)workers in all the sectors will receive lower wages due to cheap imports.

Question 19

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$ Which of the following can most reasonably be inferred for the short run after this country opens to free trade?

A)The wage rates in all the sectors of the country will increase.
B)The rental rates of capital in all the sectors of the economy will decline.
C)The wage rates and the rental rates of capital will rise in the bread industry but will fall in the wine industry.
D)The wage rates and the rental rates of capital will rise in the wine industry but will fall in the bread industry.

Question 20

The Heckscher-Ohlin theory predicts that the opening of trade between a land-abundant country and a labor-abundant country should result in:

A)higher rents and wages in both countries.
B)lower rents and wages in both countries.
C)higher rents in the labor-abundant country and higher wages in the land-abundant country.
D)higher wages in the labor-abundant country and higher rents in the land-abundant country.

Question 21

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
If the initial prices of wheat and cloth are $3 per unit then:

A)both the wage rate and the rental rate are equal to $1.
B)the wage rate and the rental rate are $1 and $2 respectively.
C)the wage rate and the rental rate are $2 and $3 respectively.
D)both the wage rate and the rental rate are equal to $2.

Question 22

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. The pre-trade wage rate relative to land rents in Alpha is _____ the relative wage rate in Beta.

A)greater than
B)less than
C)equal to
D)double

Question 23

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. Which of the following is most likely to happen in the short run following the opening of free trade between the countries?

A)All the workers in both the countries will gain while all the land owners in both the countries will lose.
B)All the workers in both countries will lose while all the land owners in both the countries will gain.
C)The workers and land owners in the food industry in Beta will gain while the workers and the landowners in the drink industry will lose.
D)The workers and the land owners in the food industry in Alpha will gain while the workers and the landowners in the drink industry will lose.

Question 24

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, Alpha will:

A)export both food and drink.
B)export drink and import food.
C)import both goods.
D)export food and import drink.

Question 25

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } \hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \\\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \\\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$ In the long run, which of the following can most reasonably be inferred after this country engages in free trade?

A)The wage rates will decline but the returns to capital will increase.
B)The returns to capital will decline but the wage rates will increase.
C)The wage rates will decline in the wine industry and will increase in the bread industry.
D)The returns to capital will fall in the wine industry and will rise in the bread industry.

Question 26

When Wassily Leontief tested the predictions of the Heckscher-Ohlin theory, he found that in 1947 the United States was exporting relatively labor-intensive goods and importing relatively capital-intensive goods. His findings:

A)contradicted the Heckscher-Ohlin theory, because the United States was relatively capital-abundant.
B)contradicted the Heckscher-Ohlin theory, because the United States was relatively labor-abundant.
C)were never supported by other studies and has thus been labeled a paradox.
D)were consistent with the predictions of the Heckscher-Ohlin theory.

Question 27

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. According to the Heckscher-Ohlin theory, Beta has a comparative advantage in the production of:

A)drink.
B)food.
C)both goods.
D)neither good.

Question 28

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
Suppose country A engages in free trade and the price of cloth increases to $4 per unit. However, the price of wheat remains unchanged. As a result of the change in the price of cloth, the landowners are most likely to be able to:

A)purchase more of both cloth and wheat than in the absence of trade.
B)purchase more wheat but less cloth than in the absence of trade.
C)purchase less of both cloth and wheat than in the absence of trade.
D)purchase more cloth but less wheat than in the absence of trade.

Question 29

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, Beta will:

A)import both food and drink.
B)import drink and export food.
C)export both food and drink.
D)export drink and import food.

Question 30

Considering the United States to be a capital-abundant country, which of the following facts would contradict the predictions of the Heckscher-Ohlin theory?

A)The United States is a net importer of labor-intensive products.
B)The United States is a net importer of products that use farmland intensively.
C)The United States is a net importer of certain natural resources such as petroleum.
D)The United States is a net importer of capital-intensive products.

Question 31

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. According to the Heckscher-Ohlin theory, Alpha has a comparative advantage in the production of:

A)drink.
B)food.
C)both goods.
D)neither good.

Question 32

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, the price of food will:

A)rise in Alpha and fall in Beta.
B)rise in both the countries.
C)fall in both the countries.
D)fall in Alpha and rise in Beta.

Question 33

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. Which of the following is most likely to happen in the long run following the opening of free trade between the countries?

A)The workers in Alpha will be better off but the land owners will be worse off.
B)The workers in Beta will be better off while the land owners will be worse off.
C)The workers and land owners in the food industry in Beta will be better off while the workers and landowners in the drink industry will be worse off.
D)The workers and land owners in the food industry in Alpha will be better off while the workers and landowners in the drink industry will be worse off.

Question 34

Suppose country Y produces only corn and clothing using only two inputs- land and labor. Production of corn requires an intensive use of land whereas, clothing is a labor-intensive good. If the price of corn increases by 15 percent, the price of clothing remaining constant, the Stolper-Samuelson theorem predicts that in the long run:

A)the rental rate of land will increase by 15 percent.
B)the rental rate of land will increase by more than 15 percent.
C)the wage rate will increase by more than 15 percent.
D)the wage rate will remain unchanged.

Question 35

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
If the initial prices of wheat and cloth are $3 per unit, the labor cost per unit of wheat output is_____ and the rental cost per unit of wheat output is _____.

A)$2; $3
B)$1; $2
C)$3; $2
D)$2; $1

Question 36

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
According to this information, which of the following statements is true?

A)Labor is used relatively intensively in the production of cloth.
B)The inputs are used in the same proportion in producing both the commodities.
C)The land to labor ratio in the production of cloth is higher than that in the production of wheat.
D)The opportunity cost of producing cloth is higher than the opportunity cost of producing wheat in country A.

Question 37

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
Suppose country A engages in free trade and the price of cloth increases to $4 per unit. However, the price of wheat remains unchanged. Under such a situation, the Stolper-Samuelson theorem will predict that:

A)the real income of the landowners will increase but that of the laborers will remain unchanged.
B)the purchasing power of the laborers will increase but that of the landowners will decline.
C)the real income of both the landowners and the laborers will decline.
D)the purchasing power of both the landowners and the laborers will increase.

Question 38

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
If the initial prices of wheat and cloth are $3 per unit, the labor cost per unit of cloth output is _____ and the rental cost per unit of cloth output is _____.

A)$3; $1
B)$1; $2
C)$2; $1
D)$1; $3

Question 39

Which of the following is most likely to be predicted by the Heckscher-Ohlin theory?

A)The industrialized nations will mainly export labor-intensive goods.
B)The developing countries will mainly export labor-intensive goods.
C)The wage rate of the low-skilled workers will be higher in the developing countries than in the developed countries.
D)Countries like the United States will completely specialize in the production of primary commodities.

Question 40

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
Suppose country A engages in free trade and the price of cloth increases from $3 per unit to $4 per unit. The price of wheat remains unchanged at $3 per unit. The wage rate and the rental rate change to _____ and _____ respectively._____.

A)$3/8; $7/8
B)$1; $5/3
C)$5/3; $2/3
D)$4/7; $3/7

Question 41

International outsourcing-the shifting of service activities from one country to another-was not an issue when the factor-price-equalization theory was developed. Does the existence of outsourcing change the implications of the theory? Justify your answer.

Question 42

As a result of the North America Free Trade Agreement (NAFTA), the United States and Canada have shifted to free trade with Mexico. It is assumed that Mexico has an abundance of unskilled labor while the United States and Canada have an abundance of skilled labor. According to the Stolper-Samuelson theorem, how this shift will affect the real wage of unskilled labor in Mexico and the real wage of unskilled labor in the United States and Canada? Also explain the impact on the real wage of skilled labor in Mexico and skilled labor in the United States and Canada.

Question 43

International trade patterns are broadly consistent with the Heckscher-Ohlin prediction that nations tend to export the products that use their abundant factors intensively.

Question 44

The Heckscher-Ohlin theory explains comparative advantage enjoyed by countries in the production of certain goods in terms of underlying differences in consumer tastes and preferences.

Question 45

While China's exports are consistent with the predictions of the Heckscher-Ohlin theory, her imports are not.

Question 46

The factor-price equalization theorem implies that laborers will end up earning the same wage rate in all countries only if the laborers are allowed to migrate between countries.

Question 47

According to the Stolper-Samuelson theorem, workers gain from opening of free trade only in the long-run, and not in the short-run, because wages are sticky in the short run.

Question 48

The Leontief paradox suggests that in the United States, physical capital was an export-oriented input.

Question 49

In the long-run, gainers and losers from trade are defined by the product sector they are employed in, rather than the factors of production they own.

Question 50

Trade makes some people absolutely better off and others absolutely worse off in each of the trading countries. However, the gainers and losers in the short-run are somewhat different from those in the long-run, because more adjustment can occur in the long-run.

Question 51

According to the specialized-factor pattern, the more a factor is concentrated in the production of a product, the more it stands to gain from an increase in the price of this product.

Question 52

In the short-run after a country engages in free trade, wages and land rents can be expected to rise in the expanding sector of the country.

Question 53

Explain the weak and the strong forms of the factor-price equalization theorem, and discuss their real world relevance.

Question 54

When factors of production move to better-paying sectors of the economy following the opening of trade in the country, wages and rents will be bid back to their pre-trade levels.

Question 55

According to the Stolper-Samuelson theorem and the Heckscher-Ohlin theory, the opening of trade will ultimately lead to lower real wages in a land-abundant country.

Question 56

Factor-price equalization theory predicts that post trade the input prices within a country will equalize.

Question 57

Suppose country X is relatively labor abundant and relatively land scarce. Country Y, on the other hand, is relatively labor scarce and relatively land abundant. The production of corn is relatively land intensive while, the production of shoes is relatively labor intensive. Explain the short and long-run effects of opening to free trade between these countries on the incomes of: workers employed in the production of corn in each country; workers employed in the production of shoes in each country; land used in the production of corn in each country; and land used in the production of shoes in each country.

Question 58

Free trade can be expected to cause a decrease in the real incomes of the owners of the factor used intensively in the import-competing industry.

Question 59

Hollywoodland, being self-sufficient in most products, trades only two goods with the Rest of the World (ROW), movies and automobiles. Both of these goods are produced using skilled labor (L) and capital (K) with the returns to capital being the interest rate (r) and the returns to skilled labor being the wage rate (w). The production of automobiles is capital intensive relative to the production of movies and Hollywoodland is skilled-labor abundant relative to the ROW.

A)State the Heckscher-Ohlin theorem and use it to predict the pattern of trade between Hollywoodland and the ROW
B)If the price of Hollywoodland's imports rises, the price of its exports remaining unchanged, what would happen to the factor returns in Hollywoodland? State the theorem used to explain the answer and, briefly state the intuition behind the theorem.
.

Question 60

The following equations describe the prices and marginal costs of producing corn and toys in a country. The numbers in the equations indicate the amounts of labor and land needed to produce a unit of corn and a unit of toys. In the equations, the wage rate and the rental rate are denoted by 'w' and 'r' respectively.
P_corn = 80w + 40r
P_toys = 100w + 30r
a.If the price per unit of corn and the price per unit of toys are initially $200, calculate the wage rate and the rental rate.Calculate the labor cost per unit of corn and per unit of toys.What is the rental cost per unit of corn and per unit of toys?
b.Suppose post-trade the price of corn increases to $240.However, the price of toys remains unchanged.What are the new values for 'w' and 'r' after adjustment to the new long-run situation?
c.What is the change in the real wage with respect to each good? What is the change in the real rental rate with respect to each good?
d.Relate your conclusions in part c to the Stolper-Samuelson theorem.