Question 1

-Refer to above figure. Two countries exist in this model, P and R. P is relatively labor (L) abundant, as is evident in the bottom right horizontal axis. If Country P were to be completely specialized in the labor-intensive product, C, it would be producing at point 4. In fact, it produces both C and P, at point 5. The (autarky) relative price of C (in terms of
F) of Country P is at point 3; and of Country R at point 1. If trade were to open up between these two countries, which would export C and which would export F? Is this consistent with the Heckscher-Ohlin model? Explain.

Accepted Answer

The answer of 
-Refer to above figure. Two countries exist...

Question 2

One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that tastes are homothetic, or that if the per capita incomes were the same in two countries, the proportions of their expenditures allocated to each product would be the same as it is in the other country. Imagine that this assumption is false, and that in fact, the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage. How would this affect the relationship between relative factor abundance between the two countries, and the nature (factor-intensity) of the product each exports? What if the taste bias favored the imported good?

Accepted Answer

The answer of One of the commonly used assumptions in...

Question 3

If Japan is relatively capital rich and the United States is relatively land rich, and if food is relatively land intensive then trade between these two, formerly autarkic countries will result in

Accepted Answer

Since the U.S. is relatively land rich, it will have a comparative advantage in producing food. Japan, being relatively capital rich, will have a comparative advantage in producing capital-intensive goods. Trade between the two countries will result in the U.S. exporting food to Japan and Japan exporting capital intensive goods to the U.S. As a result, the relative price of food will increase in the U.S. as it must give up more of its land-intensive resources to produce food than Japan must give up. Therefore, the correct answer is B.

Question 4

Assume that only two countries, A and B, exist.
 
-Refer to the table above. You are told that Country B has no minimum wage or child labor laws. Now the correct answer is

Accepted Answer

Since Country B has no minimum wage or child labor laws, it can produce Good S at a much lower cost compared to Country A. As a result, Country B will export Good S to Country A, which will not be able to compete due to higher production costs. Therefore, the correct answer is A - Country B will export Good S.

Question 5

If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade began between these two countries

Accepted Answer

According to the theory of comparative advantage, trade between countries with different factor endowments (e.g. land and capital) will result in each country specializing in the production of the product that uses its abundant factor more intensively. In this case, Australia has relatively more land per worker, meaning it is relatively abundant in land, while Belgium has relatively more capital per worker, meaning it is relatively abundant in capital. Therefore, it is expected that Australia will specialize in producing land-intensive products while Belgium will specialize in producing capital-intensive products. When trade begins between the two countries, Belgium will import land-intensive products from Australia and export capital-intensive products to Australia. This will increase the demand for land-intensive products in Australia, which will result in an increase in their relative price. Therefore, the correct answer is C.

Question 6

Why is the H.O. model called the factor-proportions theory?

Accepted Answer

The answer of Why is the H.O. model called the...

Question 7

-Refer to above figure. Would you expect to find that the real wages become equalized in both countries? Explain the reason for any differences you note.

Accepted Answer

The answer of 
-Refer to above figure. Would you expect...

Question 8

If a good is labor intensive it means that the good is produced

Accepted Answer

Labor intensive goods require relatively more labor than goods that are not labor intensive. This means that the production process involves a higher proportion of labor to other inputs, such as capital, land, or technology. The use of labor in this manner can be a strategic advantage for producers, as it may allow them to keep costs low and maintain competitiveness in certain markets where labor costs are relatively low.

Question 9

If Australia has more land per worker, and Belgium has more capital per worker,then if trade began between these two countries

Accepted Answer

The answer of If Australia has more land per worker,...

Question 10

The Heckscher-Ohlin model predicts all of the following EXCEPT

Accepted Answer

The Heckscher-Ohlin model focuses on predicting the patterns of trade, the distribution effects within countries, and the impact on factor prices and overall welfare due to trade. It does not specifically predict the volume of trade, which is determined by a range of other factors including demand, supply, and trade barriers.

Question 11

-Refer to above figure. If trade were to open up between P and R, where would the terms of trade locate in the figure above (somewhere on the P_C/P_F axis)? Would relative wages (w/r) in the two countries become equal? Is this consistent with the Heckscher-Ohlin model? Explain.

Accepted Answer

The answer of 
-Refer to above figure. If trade were...

Question 12

Trade benefits a country by

Accepted Answer

The answer of Trade benefits a country by
...

Question 13

International trade leads to complete equalization of factor prices. Discuss.

Accepted Answer

The answer of International trade leads to complete equalization of...

Question 14

If a good is capital intensive it means that the good is produced

Accepted Answer

The answer of If a good is capital intensive it...

Question 15

If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, in order to improve the country's economic welfare, the Gambinian government should

Accepted Answer

The Heckscher-Ohlin model suggests that countries will benefit from trade by exporting goods that utilize their abundant factors of production and importing goods that utilize their scarce factors. Since Gambinia has many workers (labor is abundant) but very little land and even less productive capital, it should engage in free trade to export labor-intensive products and import capital and land-intensive products, thereby improving its economic welfare.

Question 16

If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, we predict that Gambinia will export

Accepted Answer

According to the Heckscher-Ohlin model, a country with abundant labor and scarce capital is predicted to specialize in and export labor-intensive goods. Since Gambinia has many workers and little productive capital, it is likely that their production will rely heavily on labor. Therefore, option B is the best choice.

Question 17

-Refer to above figure. In autarky, Country P was producing at point 5. With trade, would its production point be found above or below point 5? Explain why. What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?

Accepted Answer

The answer of 
-Refer to above figure. In autarky, Country...

Question 18

In the Heckscher-Ohlin model, when there is international-trade equilibrium

Accepted Answer

According to the Heckscher-Ohlin model, in international-trade equilibrium, the relative price of a good should be the same in both countries. Therefore, the relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country. The model assumes that trade is based on comparative advantage, which means that each country should specialize in producing the good that uses its abundant factor of production more intensively, and then trade with the other country. This leads to an equalization of factor prices between the two countries in the long run.

Question 19

Suppose Australia, a land (K)-abundant country, and Sri Lanka, a labor(L)-abundant country, both produce labor and land intensive goods with the same technology.
 
-Using the figure above, demonstrate what happens to the composition of production (that is quantity of cloth per 1 unit of food) in Australia once trade is established between the two countries. Which country will export cloth? What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease? Would land owners in Australia lobby for or against free trade? Would land owners in Australia lobby for or against free admittance of immigrant workers?

Accepted Answer

The answer of Suppose Australia, a land (K)-abundant country, and...

Question 20

Suppose Australia, a land (K)-abundant country, and Sri Lanka, a labor(L)-abundant country, both produce labor and land intensive goods with the same technology.
 
-Use the diagram above to identify the pre-trade situation for Australia and Sri Lanka. Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage, w/r? Which product is the labor intensive, and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries. Show where the relative wages of each will appear.

Accepted Answer