Question 1

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

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

Question 2

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
A) labor-intensive goods.
B) capital-intensive goods.
C) both capital- and land-intensive goods.
D) land-intensive goods.
E) both labor- and land-intensive goods.

Accepted Answer

According to the Heckscher-Ohlin model, countries will export goods that make intensive use of factors of production that are abundant in that country. In Gambinia's case, it has many workers but very little land and even less productive capital. Therefore, it is predicted that Gambinia will export labor-intensive goods as it has an abundant labor force.

Question 3

If Australia has more land per worker, and Belgium has more capital per worker,then if trade began between these two countries,
A) the real income of landowners in Belgium would decline.
B) the real income of capital owners in Australia would increase.
C) the real income of labor in Australia would decline.
D) the real income of labor in Belgium would decline.
E) the real income of labor in both countries would decline.

Accepted Answer

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

Question 4

In the Heckscher-Ohlin model, when there is international-trade equilibrium
A) the relative price of the capital intensive good in the capital rich country will be the same as that in the capital poor country.
B) the capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
C) the capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
D) workers in the capital rich country will earn more than those in the poor country.
E) the workers in the capital rich country will earn less than those in the poor country.

Accepted Answer

The answer of In the Heckscher-Ohlin model, when there is...

Question 5

If a good is capital intensive it means that the good is produced
A) using relatively more capital than goods that are not labor intensive.
B) using capital as the only input.
C) using more capital per unit of output than goods that are not capital intensive.
D) using capital such that the total cost of capital is greater than the total cost of labor.
E) using capital such that the cost of capital is more than 50% of total cost.

Accepted Answer

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

Question 6

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 7

Trade benefits a country by
A) increasing available consumption choices.
B) reducing the need for specialization in production.
C) reducing the relative price of the exported good.
D) increasing the real income of all resource owners.
E) increasing the wage rate.

Accepted Answer

The answer of Trade benefits a country by
A) increasing available...

Question 8

If a good is labor intensive it means that the good is produced
A) using relatively more labor than goods that are not labor intensive.
B) using labor as the only input.
C) using more labor per unit of output than goods that are not labor intensive.
D) using labor such that the total cost of labor is greater than the total cost of capital.
E) using labor such that the cost of labor is more than 50% of total cost.

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

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 10

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
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.

Accepted Answer

The answer of Assume that only two countries, A and...

Question 11

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
A) an increase in the relative price of food in the U.S.
B) an increase in the relative price of food in Japan.
C) a global increase in the relative price of food.
D) a decrease in the relative price of food in both countries.
E) an increase in the relative price of food in both countries.

Accepted Answer

The answer of If Japan is relatively capital rich and...

Question 12

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

Accepted Answer

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

Question 13

If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade began between these two countries,
A) the relative price of the land-intensive product would increase in Australia.
B) the relative price of the capital-intensive product would increase in Australia.
C) the relative price of the land-intensive product would increase in Belgium.
D) the relative price of the capital-intensive product would decrease in Belgium.
E) relative product prices would diverge between Australia and Belgium.

Accepted Answer

According to the theory of comparative advantage, Australia would specialize in producing the land-intensive product and Belgium would specialize in producing the capital-intensive product. As a result, the relative price of the land-intensive product would increase in Australia as its production becomes more specialized and capital is diverted towards the production of the capital-intensive product in Belgium. This would lead to a higher opportunity cost of producing the land-intensive product in Australia, driving up its relative price.

Question 14

-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 15

-Refer to above figure. If trade were to open up between P and R, where would the world 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 16

-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 17

The Heckscher-Ohlin model predicts all of the following except
A) the volume of trade.
B) which country will export which product.
C) which factor of production within each country will gain from trade.
D) that relative wages will tend to become equal in both trading countries.
E) that trade increases a country's overall welfare.

Accepted Answer

The Heckscher-Ohlin model does not predict the volume of trade; it focuses on the patterns of trade based on factor endowments, which country will export which product, and the effects on factor prices and welfare.

Question 18

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
A) engage in free trade.
B) protect the capital-intensive product.
C) protect the land-intensive product.
D) protect the labor-intensive product.
E) discontinue all international trade.

Accepted Answer

The answer of If Gambinia has many workers but very...

Question 19

If two countries are very different in relative factor abundance, then empirically support for which of the following would less likely?
A) the Factor Price Equalization Theorem
B) the Heckscher-Ohlin Theorem
C) the Law of One Price
D) the Law of Demand
E) the Gravity Theorem

Accepted Answer

The Factor Price Equalization Theorem states that trade between two countries with different factor endowments will result in equalization of factor prices in the long run. However, if two countries are very different in relative factor abundance, such as one country having abundant labor and another having abundant capital, support for the Factor Price Equalization Theorem would be less likely. This is because the differences in factor endowments would lead to persistent differences in factor prices. Therefore, option A is less likely to be supported empirically in such a scenario.

Question 20

-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 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...

Quiz 5: Resources and Trade: The Heckscher-Ohlin Model

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

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

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

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

Trade benefits a country by

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

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

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

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

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

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

-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?

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

-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.

The Heckscher-Ohlin model predicts all of the following except

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

If two countries are very different in relative factor abundance, then empirically support for which of the following would less likely?

-Refer to above figure. If trade were to open up between P and R, where would the world 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.