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

Question 1

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?

Answer 1

not answered

Question 2

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.

Answer 2

not answered

Question 3

The Stolper-Samuelson theorem suggests that, when a country is opened to international Trade, the real income of the country's abundant factor of production will __________And the real income of the country's scarce factor of production __________.

A) rise; also will rise
B) rise; will fall
C) fall; will rise
D) fall; also will fall

Answer 3

rise; will fall

Question 4

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?

Question 5

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.

Question 6

If relatively capital-abundant country A opens trade with relatively labor-abundant Country B and the trade takes place in accordance with the Heckscher-Ohlin theorem,What would be the consequence for factor prices (w/r) in the two countries?

A) (w/r) rises in A and falls in B
B) (w/r) rises in A and also rises in B
C) (w/r) falls in A and rises in B
D) (w/r) falls in A and also falls in B

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.

Question 8

(a) In a 2x2x2 context, state the Heckscher-Ohlin theorem. Then indicate how this theorem can be obtained, utilizing the physical definition of relative factor abundance.
(b) When a country enters into trade in accordance with the Heckscher-Ohlin theorem, what happens to the real income of the country's relatively abundant factor of production and what happens to the real income of the country's relatively scarce factor of production? Carefully explain.

Question 9

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

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 10

In the situation of "demand reversal" in a 2x2x2 context where all the assumptions of the Heckscher-Ohlin analysis hold except for the assumption of identical demands across Countries, and when the countries are trading with each other,

A) one country will be conforming to the trade pattern predicted by the Heckscher-Ohlin Theorem but the other country will not be conforming to that pattern.
B) both countries will be conforming to the trade pattern predicted by the Heckscher-Ohlin theorem if the "price" (or "economic") definition of relative factor Abundance is used but not if the "physical" definition of relative factor abundance Is used.
C) both countries will be conforming to the trade pattern predicted by the Heckscher-Ohlin theorem if the "physical" definition of relative factor abundance is used but Not if the "price" (or "economic") definition of relative factor abundance is used.
D) factor price equalization across the two countries cannot occur.

Question 11

(a) State the Heckscher-Ohlin theorem. Then, in the context of a 2x2x2 model and using the "price definition" of relative factor abundance, illustrate and explain how this theorem is obtained.
(b) Continuing with the "price definition" of relative factor abundance in the 2x2x2 context, carefully explain what happens (and why) to the relative factor price difference between the two countries as the countries move from autarky to free trade.

Question 12

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.

Question 13

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.]

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 14

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."

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.

Question 16

Which one of the following is NOT an assumption in the Heckscher-Ohlin analysis?

A) constant returns to scale
B) imperfect competition
C) identical production functions across countries
D) identical tastes across countries

Question 17

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

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

Question 18

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.

Question 19

In the "specific-factors" model where capital in each sector is fixed but labor can move Freely between the two sectors, the opening of the country to trade will increase the real Return to capital in the __________ sector and will increase the real wage of a worker Who __________.

A) export; consumes mostly the import good
B) export; consumes mostly the export good
C) import-competing; consumes mostly the import good
D) import-competing; consumes mostly the export good

Question 20

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

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 (P_X/P_Y)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 21

In a two-country world, if country A is the relatively labor-abundant and country B is the relatively capital-abundant country by the "price" definition of factor abundance (and where w is the wage rate and r is the return to capital), then __________. When the countries move from autarky to Heckscher-Ohlin-type trade, the result will be that __________.

A) (w/r)_A < (w/r)_B; (w/r)_A will rise and (w/r)_B will fall
B) (w/r)_A < (w/r)_B; (w/r)_A will fall and (w/r)_B will rise
C) (w/r)_A > (w/r)_B; (w/r)_A will rise and (w/r)_B will fall
D) (w/r)_A > (w/r)_B; (w/r)_A will fall and (w/r)_B will rise

Question 22

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?

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.

Question 23

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 __________.

A) (L/T)_A < (L/T)_B; (w/t)_A > (w/t)_B
B) (L/T)_A < (L/T)_B; (w/t)_A < (w/t)_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 24

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

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

Question 25

In the following diagram,

At factor prices (w/r)_I, good X is the __________, and, at factor prices (w/r)_II, good Y is The __________.

A) labor-intensive good; labor-intensive good
B) labor-intensive good; capital-intensive good
C) capital-intensive good; labor-intensive good
D) capital-intensive good; capital-intensive good

Question 26

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.

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

Question 27

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

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 28

An implication of the Heckscher-Ohlin theorem is that

A) if two countries have identical tastes, then no trade will occur between them.
B) the relative price of a country's scarce factor of production will rise when the Country is opened to trade.
C) income distribution in a country does not change when a country is opened to trade.
D) two countries with identical tastes can still have a basis for trade if factor endowments Of the countries differ and if factor intensities of the commodities differ.

Question 29

If country I is defined as "relatively capital-abundant" in relation to country II by the "price" (or "economic") definition of factor abundance, then the price of labor relative to the price of capital is __________ in country I than in country II, and the Heckscher-Ohlin theorem would suggest that country I would export relatively __________ goods to country II.

A) higher; capital-intensive
B) higher; labor-intensive
C) lower; capital-intensive
D) lower; labor-intensive

Question 30

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 __________.

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

Question 31

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 __________.

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