Question 1

Given the following diagram that shows the relationship between the price of good X relative to the price of good Y (PX/PY) 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 [(PX/PY)A], relative autarky goods prices in country B [(PX/PY)B], and (w/r) [where the (PX/PY) associated with (w/r) is the highest (PX/PY) 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.

Accepted Answer

A)   good X; good Y is
B)   good X; good X also is
C)   good Y; good Y also is
D)   good Y; good X is A

Question 2

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 __________.

Accepted Answer

A)   increase; will decrease
B)   increase; also will increase
C)   decrease; also will decrease
D)   decrease; will increase B

Question 3

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."

Accepted Answer

(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.

Question 4

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

Accepted Answer

A)   the price of the export good rises.
B)   real income is magnified even though the PPF does not change.
C)   the price of the abundant factor rises faster than does the price of the export good.
D)   the price of the scarce factor rises.

Question 5

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.

Accepted Answer

The answer of Two of the strong assumptions underlying the...

Question 6

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?

Accepted Answer

The answer of Will the price definition of factor abundance...

Question 7

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.

Accepted Answer

The answer of In the context of the "specific-factors model,"...

Question 8

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 __________.

Accepted Answer

A)   good X; will export good Y
B)   good X; also will export good X because there has been a factor-intensity reversal
C)   good Y; also will export good Y because there has been a factor-intensity reversal
D)   good Y; will export good X

Question 9

In the following diagram showing the relationship between the price of good X relative to the price of good (PX/PY) 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 (PX/PY) associated with (w/r) is the highest (PX/PY) on the graph.]

Accepted Answer

A)   labor-intensive; also the relatively labor-intensive
B)   labor-intensive; the relatively capital-intensive
C)   capital-intensive; the relatively labor-intensive
D)   capital-intensive; also the relatively capital-intensive

Question 10

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 __________.

Accepted Answer

A)   (L/T) A B; (w/t) A > (w/t) B
B)   (L/T) A B; (w/t) A B
C)   (L/T) A > (L/T) B; (w/t) A > (w/t) B
D)   (L/T) A > (L/T) B; (w/t) A < (w/t)

Question 11

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.

Accepted Answer

The answer of Will the gains from trade be larger...

Question 12

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?

Accepted Answer

The answer of It has been argued that the effect...

Question 13

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.

Accepted Answer

The answer of Explain how relative factor abundance can determine...

Question 14

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

Accepted Answer

A)   The production function for a given good is the same in both countries.
B)   If a particular good is the relatively labor-intensive good at one set of relative factor Prices, then it is also the relatively labor-intensive good at any other set of relative Factor prices.
C)   A given relative commodity price ratio, say (PX/PY) 1, can be associated with more than One relative factor price ratio, e.g., say with (w/r) 1 as well as with (w/r) 2.
D)   Tastes and preferences (i.e., the community indifference curve maps)  are identical in the two countries.

Question 15

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

Accepted Answer

A)   demand reversal.
B)   factor-intensity reversal.
C)   balance-of-payments reversal.
D)   factor price reversal.

Question 16

(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.

Accepted Answer

The answer of (a) Assume a two-country world with two...

Question 17

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

Accepted Answer

A)   the good will be exported from A to B.
B)   the good will be exported from B to A.
C)   intra-industry trade will occur in the good.
D)   the good will be a "nontraded good."

Question 18

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

Accepted Answer

A)   factor-intensity reversal.
B)   the "specific factors" model.
C)   demand reversal.
D)   factor-price equalization between the two countries.

Question 19

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.

Accepted Answer

The answer of Domestic pressures for trade protection appear to...

Question 20

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?

Accepted Answer

A)   Total output of the firm will become greater than Q1.
B)   Home market price will rise above P1.
C)   The firm will increase its profits by engaging in "dumping."
D)   The firm will maintain its home market price at P?1 and will sell abroad at price P2.

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

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 .