Question 1

Let us assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short-run, but lose in the long-run, from the opening of trade?

Accepted Answer

According to the Heckscher-Ohlin theory, trade benefits the country by allowing it to specialize in the production of goods that use abundant resources and export them, while importing goods that require scarce resources. In this case, the country is labor-abundant, which means that cloth-making is labor-intensive and farming is land-intensive. Therefore, the country will specialize in cloth-making and export it, while importing food. This will increase the demand for cloth and lead to higher wages for domestic workers in the cloth-making sector in the short run. However, in the long run, the increase in demand for cloth will attract more investment in the cloth-making sector, leading to an increase in the supply of cloth and a decrease in wages for domestic workers in the cloth-making sector. Domestic landowners in the cloth-making sector will benefit from the increase in demand for cloth in the short run, but will lose in the long run due to the decrease in wages.

Question 2

The theory which predicts that trade occurs because of differences in the availability of inputs across countries and the differences in the proportions in which the inputs are used in producing different products is called:

Accepted Answer

The Heckscher-Ohlin theory states that trade occurs due to differences in the availability of factors of production and the proportions in which they are used to produce different goods. This theory is also known as the factor proportions theory. The Stolper-Samuelson theory explains how changes in relative prices resulting from trade affect the wages and returns to factors of production, whereas the theory of comparative advantage explains how countries can benefit from specializing in the production and trade of goods in which they have a lower opportunity cost. The theory of absolute advantage states that trade benefits all countries involved when each specializes in the production of the goods it can produce more efficiently.

Question 3

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. According to H-O theory, country A has a comparative advantage in the production of: $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$

Accepted Answer

C

Question 4

With free trade, if country X is relatively labor abundant and relatively land scarce and country Y is relatively labor scarce and relatively land abundant, the factor-price equalization theorem predicts that:

Accepted Answer

The factor-price equalization theorem states that with free trade, factor prices (i.e. wages and rents) will equalize between countries as they specialize in producing the goods in which they have a comparative advantage. In this case, country X is relatively labor abundant, so there will be an increase in demand for labor in country X as they specialize in producing goods that require labor. This will lead to an increase in wages in country X. Similarly, country Y is relatively land-abundant, so there will be an increase in demand for land in country Y as they specialize in producing goods that require land. This will lead to an increase in rents in country Y. Overall, wages will rise in country X and fall in country Y until they equalize, while rents will rise in country Y and fall in country X until they equalize.

Question 5

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Following the opening of trade, Country A would probably:

Accepted Answer

Country A is capital-abundant, meaning it has a relatively large amount of capital compared to labor. In the production of both bread and wine, capital is used more intensively than labor. Therefore, Country A has a comparative advantage in producing goods that use capital intensively, such as wine. After trade opens, Country A will likely export wine and import bread, which is less capital-intensive and uses more labor.

Question 6

The Stolper-Samuelson theorem indicates that given certain assumptions and conditions:

Accepted Answer

The Stolper-Samuelson theorem states that when the price of a good rises, the real return to the factor used intensively in the production of that good will also rise. Therefore, in the context of international trade, the factor used intensively in the export industry will see an increase in its real return.

Question 7

According to the Stolper-Samuelson theorem, a price change that reduces a country's production of its exportable product would:

Accepted Answer

The Stolper-Samuelson theorem states that a price change that reduces a country's production of its exportable product would reduce the returns to the factor of production used intensively in the export industry. This is because a reduction in the production of the exportable product would lead to a decrease in the demand for the factor of production used intensively in that industry, thus reducing its returns.

Question 8

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following is most likely to happen if country A engages in free trade with other countries?

Accepted Answer

Country A is capital-abundant and uses more capital relative to labor to produce wine than bread. According to the Heckscher-Ohlin theorem, a country will export the good that intensively uses its abundant factor of production. Therefore, Country A is likely to export wine, increasing its price domestically, and import bread, reducing its price domestically.

Question 9

In the short-run, following the opening of trade:

Accepted Answer

In the short-run, following the opening of trade, all groups tied to declining sectors of the economy will suffer from lower returns. This includes workers in declining industries, as well as owners of capital and land tied to those sectors. However, in the long-run, trade can bring overall benefits to the economy as a whole.

Question 10

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. Based on this information, which of the following statements is true? $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$

Accepted Answer

Wine requires more capital units relative to labor units (20:10) compared to bread (5:4), making wine the relatively capital-intensive good.

Question 11

According to the factor-price-equalization theorem, free trade between any two countries equalizes:

Accepted Answer

The factor-price-equalization theorem posits that free trade between countries leads to the equalization of not only the prices of products but also the prices of individual factors of production (like labor and capital) between those countries, assuming there are no transportation costs and factors of production are mobile within countries but not between them.

Question 12

Country A is relatively land-abundant and wheat is relatively land-intensive. Given the assumptions of the Heckscher-Ohlin model, the opening of trade in this country will cause the domestic price of wheat to:

Accepted Answer

According to the Heckscher-Ohlin model, a country will export goods that intensively use its abundant factor of production. Since Country A is land-abundant and wheat is land-intensive, opening trade will increase the demand for wheat, causing its domestic price to rise.

Question 13

If trade corresponds to the Heckscher-Ohlin theory, which of the following is most likely to happen in the long run after a labor-abundant country engages in free trade?

Accepted Answer

According to the Heckscher-Ohlin theory, a labor-abundant country will have a comparative advantage in producing goods that are labor-intensive. When it engages in free trade, it will export labor-intensive goods and import capital-intensive goods. As a result, the capital to labor ratio in the export sector will increase, as more capital is used in producing the exported goods. This increase in capital intensity will lead to higher productivity and higher wages for workers. Therefore, the correct answer is C.

Question 14

Which of the following statements is true?

Accepted Answer

Free trade leads to the expansion of the export-oriented sector due to increased access to foreign markets, but it can cause contraction in the import-competing sector as cheaper imports flood the market. Therefore, statement B is true. Statement A is incorrect because free trade expands the export sector. Statement C is incorrect because free trade increases the variety of goods available and expands choices for domestic consumers. Statement D is incorrect because only efficient domestic producers benefit from free trade, while inefficient producers may suffer.

Question 15

The Stolper-Samuelson theorem predicts that free trade between the United States, a capital-abundant country, and Mexico, a labor-abundant country, would ultimately result in:

Accepted Answer

The Stolper-Samuelson theorem, part of international trade theory, suggests that opening trade between countries leads to benefits for the abundant factor in each country. For a capital-abundant country like the United States, it predicts that the return to capital (profits) would increase, while the return to labor (wages) would decrease. Conversely, in a labor-abundant country like Mexico, wages would rise as the demand for labor increases with trade. Therefore, the theorem predicts higher wages in Mexico and lower wages in the United States as a result of free trade between them.

Question 16

The factor-price-equalization theorem tells us that free trade between two countries should result in:

Accepted Answer

The factor-price-equalization theorem states that free trade will result in the equalization of factor prices (wages, rents, and returns to capital) between countries. This means that workers of the same skill level in the two countries will earn the same wage rate, but not necessarily that all workers in the two countries will earn the same wage rate (as in option A). Option B is incorrect because the theorem does not assume that all workers in the two countries have the same skill level. Option D is also incorrect because the theorem is concerned with factor prices, not input prices.

Question 17

According to the Stolper-Samuelson theorem, an increase in the price of a country's imports will:

Accepted Answer

The answer of According to the Stolper-Samuelson theorem, an increase...

Question 18

In the short-run, following the opening of trade:

Accepted Answer

When trade opens, the import-competing sectors face competition from cheaper or better-quality imports, leading to a decline in demand for their products. This reduced demand decreases the need for inputs (like labor) in these sectors, which in turn lowers the factor payments, such as wages, to workers in the import-competing sectors.

Question 19

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following can most reasonably be inferred for the short run after this country opens to free trade?

Accepted Answer

Given that country A is capital-abundant and produces bread and wine, with wine requiring significantly more capital for production, it can be inferred that upon opening to free trade, the country will specialize in wine production due to its comparative advantage in capital-intensive goods. This specialization will increase the demand for capital and its rental rates in the wine industry, while the demand and wages for labor, more intensively used in bread production, will decrease in that sector.

Question 20

The Heckscher-Ohlin theory predicts that the opening of trade between a land-abundant country and a labor-abundant country should result in:

Accepted Answer

According to the Heckscher-Ohlin theory, a land-abundant country has a comparative advantage in producing land-intensive goods, while a labor-abundant country has a comparative advantage in producing labor-intensive goods. When they open trade, the land-abundant country will export land-intensive goods and import labor-intensive goods, and the opposite will happen for the labor-abundant country. This will lead to an increase in demand for labor in the land-abundant country, leading to higher wages, and an increase in demand for land in the labor-abundant country, leading to higher rents. Therefore, the opening of trade should result in higher wages in the labor-abundant country and higher rents in the land-abundant country.

Quiz 5: Who Gains and Who Loses From Trade

The theory which predicts that trade occurs because of differences in the availability of inputs across countries and the differences in the proportions in which the inputs are used in producing different products is called:

With free trade, if country X is relatively labor abundant and relatively land scarce and country Y is relatively labor scarce and relatively land abundant, the factor-price equalization theorem predicts that:

The Stolper-Samuelson theorem indicates that given certain assumptions and conditions:

According to the Stolper-Samuelson theorem, a price change that reduces a country's production of its exportable product would:

In the short-run, following the opening of trade:

According to the factor-price-equalization theorem, free trade between any two countries equalizes:

Country A is relatively land-abundant and wheat is relatively land-intensive. Given the assumptions of the Heckscher-Ohlin model, the opening of trade in this country will cause the domestic price of wheat to:

If trade corresponds to the Heckscher-Ohlin theory, which of the following is most likely to happen in the long run after a labor-abundant country engages in free trade?

Which of the following statements is true?

The Stolper-Samuelson theorem predicts that free trade between the United States, a capital-abundant country, and Mexico, a labor-abundant country, would ultimately result in:

The factor-price-equalization theorem tells us that free trade between two countries should result in:

According to the Stolper-Samuelson theorem, an increase in the price of a country's imports will:

In the short-run, following the opening of trade:

The Heckscher-Ohlin theory predicts that the opening of trade between a land-abundant country and a labor-abundant country should result in: