Deck 4: Factor Endowments and the Commodity Composition of Trade

Question 1

List the assumptions of the factor-proportions theory of international trade.

Answer 1

The factor-proportions theory is based on the following assumptions: 1) two countries; two goods; and two factors of production; 2) both countries have the same technology and each good is produced under constant returns to scale; 3) both countries have perfectly competitive product and factor markets and prices of the two goods and factors of production are determined by supply and demand; 4) there are no transportation costs, tariffs, or other obstructions to free trade between countries and after the introduction of international trade neither country completely specializes in producing a particular good; 5) consumers in the two countries have equal tastes and preferences for each of the two goods; 6) labor and capital are assumed to be mobile domestically but not internationally; 7) the production techniques available to produce the two goods are such that one good is everywhere capital intensive and the production of the other good is everywhere labor intensive; and 8) the resources of both countries are fully employed both before and after trade.

Question 2

Assume that the U.S. is labor abundant relative to Japan and that Japan is capital abundant relative to the U.S. What does this mean for international trade between the two countries?

Answer 2

The factor-proportions theory states that a country has a comparative advantage in, and exports, the good that intensively uses the country's abundant factor of production. The U.S. will have a comparative advantage in labor-intensive goods and Japan will be a comparative advantage in capital-intensive goods.

Question 3

Discuss how international trade tends to change the industrial structure of a country.

Answer 3

Industrial structure refers to the percentage of output that is accounted for by each industry within a country. Without trade, a country would have a certain percentage of their total industrial capacity devoted to producing various goods. By allowing international trade, each country specializes its production and changes the percentage of its production that is allocated to produce exports and import competing goods.

Question 4

Why are factor prices so similar in the U.S. and Canada?

Question 5

Discuss the role of international trade in the economic development of India and South Korea.

Question 6

Describe the effects that international trade has on the distribution of income.

Question 7

How could international trade improve the standard of living in developing countries that are relatively labor abundant?

Question 8

Suppose that capital in a comparative disadvantage industry cannot move out of that industry in the short run. Describe what happens to the return to capital in the comparative disadvantage and comparative advantage industries.

Question 9

Describe what Leontief found when he tested the factor-proportions theory for the first time.

Question 10

What explanations have been given for the Leontief Paradox?