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?

Accepted Answer

The price definition of factor abundance may not produce the same conclusion as the physical definition of factor abundance in the presence of demand reversal. This is because the price definition of factor abundance is based on the relative prices of factors of production, while the physical definition is based on the actual quantities of factors available.

In the presence of demand reversal, the relative prices of factors may not accurately reflect their physical abundance. For example, if there is a sudden increase in demand for a particular factor, its price may rise even if its physical abundance has not changed. This could lead to a situation where the price definition of factor abundance indicates scarcity, while the physical definition indicates abundance.

In such cases, the price definition of factor abundance may not accurately reflect the true availability of factors of production. This is why it is important to consider both the price and physical definitions of factor abundance, especially in the presence of demand reversal, in order to make informed decisions about resource allocation and production.

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.

Accepted Answer

The gains from trade will be smaller if one of the factors is not mobile in production. This is because when a factor is not mobile, it cannot easily move to where it is most productive, leading to inefficiencies in production. This reduces the potential gains from trade as the factor that is not mobile cannot be utilized to its fullest potential.

To demonstrate this graphically, we can use a production possibilities frontier (PPF) diagram. If one factor is not mobile, the PPF will be less efficient, leading to a smaller area of potential gains from trade compared to a scenario where both factors are mobile.

However, it is not true that if neither factor is mobile, the country will receive no gains from trade. Even if neither factor is mobile, there can still be gains from trade through specialization and comparative advantage. By specializing in the production of goods and services where they have a comparative advantage, countries can still benefit from trade, even if factors are not mobile. This is because trade allows countries to consume a combination of goods and services that is outside their own production possibilities frontier, leading to gains from trade.

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 __________.

Accepted Answer

The Stolper-Samuelson theorem predicts that when a country opens to international trade, the price of the product that uses the abundant factor intensively will increase. As a result, the owners of the abundant factor will see their real income rise, while the owners of the scarce factor will see their real income fall. Therefore, the correct choice is B, where the real income of the country's abundant factor of production will rise, and the real income of the country's scarce factor of production 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?

Accepted Answer

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

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.

Accepted Answer

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

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?

Accepted Answer

According to the Heckscher-Ohlin theorem, when a capital-abundant country (A) trades with a labor-abundant country (B), the relative demand for labor in country A will increase, raising wages (w) relative to the return on capital (r). Conversely, in country B, the relative demand for capital will increase, raising the return on capital (r) relative to wages (w). This leads to a convergence in factor prices between the two countries, with (w/r) falling in the capital-abundant country (A) and rising in the labor-abundant country (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.

Accepted Answer

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

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.

Accepted Answer

The answer of (a) In a 2x2x2 context, state the...

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

Accepted Answer

The total cost of exporting the good from country A to B would be $13 per unit ($10 + $3), which is higher than the cost of the good in country B ($12). Therefore, it would not be economically viable to export the good, making it 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,

Accepted Answer

The answer of In the situation of "demand reversal" in...

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.

Accepted Answer

The answer of (a) State the Heckscher-Ohlin theorem. Then, in...

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.

Accepted Answer

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

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.]

Accepted Answer

The answer of In the following diagram showing the relationship...

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."

Accepted Answer

The answer of Carefully explain, for each of the following...

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.

Accepted Answer

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

Question 16

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

Accepted Answer

The Heckscher-Ohlin model assumes perfect competition, not imperfect competition. Other assumptions like constant returns to scale, identical production functions, and tastes across countries are part of the model's framework.

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

Accepted Answer

This situation is known as factor-intensity reversal, where the relative cost of factors of production (labor and capital) changes, leading to a change in the factor intensity of a commodity. A commodity may require more labor at lower relative wages, making it labor-intensive, but as relative wages of capital rise, it may become more capital-intensive. Thus, the factor intensity of the commodity is reversed. The other options are not relevant to this situation.

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.

Accepted Answer

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

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 __________.

Accepted Answer

In the specific-factors model, opening to trade benefits the export sector, increasing the return to capital there. Workers who consume mostly the import good benefit from lower prices due to imports, thus their real wage increases.

Question 20

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

Accepted Answer

The Heckscher-Ohlin model assumes a one-to-one relationship between relative commodity prices and relative factor prices, contradicting choice C's implication of a many-to-one relationship.

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