Deck 4: Trade: Factor Availability and Factor Proportions Are Key

Question 1

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. Which of the following statements is true?

A)Production of automobiles is relatively labor-intensive.
B)Production of shoes is relatively labor-intensive.
C)Production of shoes is relatively cheaper in the U.S than the rest of the world.
D)The laborers in the United States are less productive than the laborers in the Rest of the World.

Answer 1

B

Question 2

The figure given below shows the post-trade production and consumption points in country Y. AB is the production-possibility curve of country Y. I₁ is the community indifference curve of country Y. Country Y exports:

A)50 gallons of wine.
B)60 pounds of cheese.
C)40 gallons of wine.
D)20 pound of cheese.

Answer 2

A

Question 3

In international trade jargon, constant cost production-possibility curves are associated with _____ specialization while increasing cost production-possibility curves are associated with _____ specialization.

A)no; partial
B)complete; no
C)complete; partial
D)partial; complete

Answer 3

C

Question 4

Which of the following economists proposed an international trade model that explains international trade patterns using factor proportions?

A)Paul Krugman and Elhanan Helpman
B)David Ricardo
C)Eli Heckscher and Bertil Ohlin
D)John Maynard Keynes

Question 5

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. This information indicates that the United States:

A)is a relatively capital-scarce country.
B)has a scarcity of land.
C)is a relatively land abundant country.
D)is a relatively capital-abundant country.

Question 6

In the figure given below AB is the production-possibility curve of Canada. In the absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the line RS. I₁ and I₂ are the pre-trade and the post trade community indifference curves of Canada respectively. In the absence of trade Canada will:

A)produce and consume at point S_1.
B)produce and consume at point C_0.
C)produce at point S₁ and consume at point C_0.
D)produce and consume at point C₁.

Question 7

China has 20% of the world's population but only 10% of the world's farmable land. Which of the following will be predicted by the Heckscher-Ohlin theory, if China begins to trade with other countries?

A)China will export land-intensive goods like wheat and import labor-intensive goods like clothing.
B)China will shift resources into the production of agricultural goods and away from manufactured goods.
C)China will shift resources from the production of agricultural goods to the production of labor-intensive goods.
D)China will export capital-intensive goods like automobiles and import labor-intensive goods like clothing.

Question 8

In the figure given below AB is the production-possibility curve of Canada. In the absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the line RS. I₁ and I₂ are the pre-trade and the post trade community indifference curves of Canada respectively. After Canada engages in free trade, it will:

A)produce at point S₁ and consume at point C₁.
B)produce and consume at point C_0.
C)produce at point S₁ and consume at point C_0.
D)produce and consume at point C1.

Question 9

The figure given below shows the post-trade production and consumption points in country Y. AB is the production-possibility curve of country Y. I₁ is the community indifference curve of country Y. Here country Y's production-possibility curve indicates that it faces _____ marginal costs of production.

A)constant
B)increasing
C)decreasing
D)fluctuating

Question 10

The figure given below shows the post-trade production and consumption points in country Y. AB is the production-possibility curve of country Y. I₁ is the community indifference curve of country Y. Country Y imports:

A)40 gallons of wine.
B)60 pounds of cheese.
C)50 gallons of wine.
D)80 pounds of cheese.

Question 11

Consider a two-country two-good model where labor is the only factor of production. Each country faces an increasing-cost production-possibility curve. In this model the amounts of both goods that are produced in a country in no-trade situation are determined by:

A)the relative prices of the goods.
B)the factor endowments in the economy.
C)technology differences between the industries.
D)the aggregate demand in the economy.

Question 12

In the figure given below AB is the production-possibility curve of Canada. In the absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the line RS. I₁ and I₂ are the pre-trade and the post trade community indifference curves of Canada respectively. Which of the following can be inferred from this figure?

A)Canada has a comparative advantage in the production of wheat.
B)Canada has a comparative advantage in the production of cotton.
C)Canada has an absolute disadvantage in the production of both the goods.
D)Canada has absolute advantage in the production of both the goods.

Question 13

Which of the following statements is true about production-possibility curves?

A)Constant cost production-possibility curves are straight lines and usually lead to complete specialization under free trade.
B)Under free trade, bowed-out production-possibility curves are associated with partial specialization, because the opportunity cost of producing each good is constant along the curve.
C)Increasing cost production-possibility curves provide us with information about the preferences of the consumers.
D)Constant cost production-possibility curves are convex to the origin.

Question 14

The figure given below shows the production-possibility curves of Canada (AB) and the Rest of the World (CD). The pre-trade price ratio in Canada and the Rest of the World are given by the lines P₁ and P₃ respectively. The international price ratio faced by the countries is represented by the line P₂. I?₁ and I₂ are the pre-trade and post-trade social indifference curves for both Canada and the Rest of the World respectively. Before Canada entered into a trade with the rest of the world, the total amount of cotton produced in the world was _____ bales and the total amount of wheat produced in the world was _____ bushels.

A)24; 19
B)24; 16
C)19; 24
D)18; 24

Question 15

Which of the following best explains why increasing marginal costs of production arise?

A)The factor endowments vary across countries.
B)All the factor inputs are not fully utilized in the production of different commodities.
C)Different consumers have different taste and preference sets.
D)Different commodities use inputs in different proportions.

Question 16

Assume that country X produces two goods-sugar and shoes-and that the country's production possibility curve is "bowed-out." As the country produces more sugar the opportunity cost of sugar in terms of shoes foregone will:

A)increase.
B)decrease.
C)initially increase and then decrease.
D)remain unchanged.

Question 17

The figure given below shows the production-possibility curves of Canada (AB) and the Rest of the World (CD). The pre-trade price ratio in Canada and the Rest of the World are given by the lines P₁ and P₃ respectively. The international price ratio faced by the countries is represented by the line P₂. I?₁ and I₂ are the pre-trade and post-trade social indifference curves for both Canada and the Rest of the World respectively. In the absence of trade, Canada consumes _____ bales of cotton and _____ bushels of wheat.

A)20; 3
B)16; 6
C)20; 6
D)12; 11

Question 18

Assume a two-country, two-good, and two inputs model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the Rest of the World would:

A)export steel and import wheat.
B)export wheat and import steel.
C)import both the goods from the United States.
D)export both the goods to the United States.

Question 19

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. The relationships shown here indicate that, with no trade, in the United States:

A)the relative labor endowment is higher than in the Rest of the World.
B)the price of automobiles relative to shoes is lower than in the Rest of the World.
C)the price of shoes relative to automobiles is lower than in the Rest of the World.
D)the relative capital endowment is the same as in the Rest of the World.

Question 20

Assume a two-country, two-good, and two-input model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the United States would:

A)export steel and import wheat.
B)export wheat and import steel.
C)import both the goods from the rest of the world.
D)export both the goods to the rest of the world.

Question 21

In the absence of trade, a country produces at a point where its production-possibility curve is tangent to the highest possible community indifference curve.

Question 22

According to the Heckscher-Ohlin theory, if the proportion of labor to capital in a country is greater than the proportion of labor to capital in the rest of the world, we can conclude that the country is labor abundant and will have a comparative advantage in the production of goods that use labor intensively.

Question 23

An indifference curve shows the various consumption bundles that result in the same level of well-being for an individual.

Question 24

In a two-country two-good model, the opening of trade will necessarily lead to complete specialization in the production of one good by one country and complete specialization in the production of the other good by the other country.

Question 25

The production-possibility curve illustrates the consumption preferences of a country's population, and explains why all people prefer to be employed rather than unemployed.

Question 26

As a country moves up along its "bowed-out" production possibility curve, the opportunity cost of producing more of the good measured on the y-axis decreases.

Question 27

If country A is relatively abundant in labor and country B is relatively abundant in capital, the Heckscher-Ohlin theory predicts that country A will export relatively labor-intensive goods and country B will export relatively capital-intensive goods.

Question 28

Country Y has 15 thousand acres of land and 45 thousand laborers, whereas the Rest of the World has 100 thousand acres of land and 200 thousand laborers. These countries produce a labor-intensive good A, and a land-intensive good B. When trade opens up between these countries, it can be inferred that country Y will:

A)export both goods.
B)export good B, and import good A.
C)export good A, and import good B.
D)import both goods.

Question 29

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. If trade opens up between the United States and the Rest of the World, according to the Heckscher-Ohlin model, the Rest of the World will export _____ and import _____.

A)both the goods; neither good
B)shoes; automobiles
C)automobiles; shoes
D)neither good; both of the goods

Question 30

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. According to the Heckscher-Ohlin model, free trade between the
United States and the Rest of the World would result in:

A)an improvement in economic well-being in the United States but deterioration of economic well-being in the Rest of the World.
B)no change in economic well-being in the United States but an improvement in economic well-being in the Rest of the World.
C)an improvement in economic well-being in both the United States and the Rest of the World.
D)deterioration of economic well-being in the United States but an improvement in economic well-being in the Rest of the World.

Question 31

The table given below shows the units of land and labor required to produce a unit of bread and cheese respectively in country X. Identify the correct statement. $$\begin{array} { | c | c | c | } \hline & \text { 1 urit of Bread } & \text { 1 unit of Cheese } \\\hline \text { Labor Input } & 5 \text { units } & 20 \text { units } \\\hline \text { Land Input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$

A)Production of bread is relatively labor-intensive in the country.
B)Production of bread is relatively land-intensive in the country.
C)The opportunity cost of producing an extra unit of bread is 2 units of cheese.
D)The domestic price ratio in the country is 2 units of bread per unit of cheese.

Question 32

Country Y has 15 thousand acres of land and 45 thousand laborers, whereas the Rest of the World has 100 thousand acres of land and 200 thousand laborers. These countries produce a labor-intensive good A, and a land-intensive good B. Based on the information given here, we can conclude that:

A)country Y is relatively labor-abundant.
B)country Y enjoys absolute advantage in the production of good B.
C)the Rest of the World is relatively labor-abundant.
D)the factor proportions are the same in both country Y and the rest of the world.

Question 33

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. If trade opens up between the United States and the Rest of the World, according to the Heckscher-Ohlin model, the United States will export _____ and import _____.

A)both the goods; neither good
B)shoes; automobiles
C)automobiles; shoes
D)neither good; both of the goods

Question 34

Increasing-cost production-possibility curves are bowed out from the origin.

Question 35

The table given below shows the units of land and labor required to produce a unit of bread and cheese respectively in country X. If country X is a relatively land-abundant country, the opening up of free trade would cause the price of bread relative to cheese to: $$\begin{array} { | c | c | c | } \hline & \text { 1 urit of Bread } & \text { 1 unit of Cheese } \\\hline \text { Labor Input } & 5 \text { units } & 20 \text { units } \\\hline \text { Land Input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$

A)rise.
B)fall.
C)stay the same.
D)initially rise but fall afterward.

Question 36

The table given below shows the units of land and labor required to produce a unit of bread and cheese respectively in country X. If country X is land-abundant, the opening up of free trade would result in: $$\begin{array} { | c | c | c | } \hline & \text { 1 urit of Bread } & \text { 1 unit of Cheese } \\\hline \text { Labor Input } & 5 \text { units } & 20 \text { units } \\\hline \text { Land Input } & 4 \text { units } & 10 \text { units } \\\hline\end{array}$$

A)a decline in the production of both bread and cheese in the country.
B)an increase in the production of bread but a decline in the production of cheese in the country.
C)an increase in the production of both bread and cheese in the country but production of bread will rise at a lesser pace than the production of cheese.
D)a decline in the production of bread but an increase in the production of cheese in the country.

Question 37

The production-possibility curve alone does not provide enough information to determine the amount of each good produced by the economy.

Question 38

When increasing amounts of a variable factor are added to a fixed factor, the output increases but at a diminishing rate.

Question 39

Assume a two-country two-good two-input model where the following relationships hold: (K/L)_U.S. > (K/L)_ROW
(K/L)_automobiles > (K/L)_shoes
Where (K/L)_U.S. is the capital-labor ratio in the United States, (K/L)_ROW is the capital-labor ratio in the Rest of the World, (K/L)_automobiles indicates the capital-labor ratio in the production of automobiles, and (K/L)_shoes indicates the capital-labor ratio in the production of shoes. Assume further that technology and tastes are the same in the United States and the Rest of the World. The relationships shown in here indicate that the United States has a comparative advantage in the production of _____ while the Rest of the World has a comparative advantage in the production of _____.

A)both the goods; neither shoes nor automobiles
B)shoes; automobiles
C)automobiles; shoes
D)neither shoes nor automobiles; both of the goods

Question 40

The community indifference curves illustrate the technological capabilities of a country.

Question 41

Explain the differences between the two-country two-good model with constant costs of production and the model with increasing costs of production. Adequately describe the production possibilities curves for each country in each case. Describe free-trade production and the degree of specialization in each country under both cost situations.

Question 42

Explain why the Heckscher-Ohlin model predicts only partial specialization in the production of two goods, while Ricardo's comparative advantage model predicts full specialization.

Question 43

The difference between the Heckscher-Ohlin theory of trade and the Ricardian model is that the former assumes that an economy produces only two goods.

Question 44

If country A is relatively land-abundant and country B is relatively labor-abundant, the Heckscher-Ohlin theory predicts that country A will export textiles (a relatively labor-intensive good) and country B will export corn (a relatively land-intensive good).

Question 45

After the North American Free Trade Agreement (NAFTA) was signed, trade restrictions between Canada, the United States, and Mexico were eased and cross-border trade increased. What predictions would the Heckscher-Ohlin model make concerning the changes in labor-intensive industries such as textiles in both Mexico and the United States and in capital-intensive industries such as steel in both Mexico and the United States, as a result of NAFTA?

Question 46

"In the two-good, two-country model with increasing costs, the output quantities are determined only by considering society's preferences as illustrated with indifference curves. However, in the same model, it is possible to determine the post-trade consumption point in each country without indifference curves." Is this statement true or false? Justify your answer.

Question 47

Assume a two-country two-good two-input model. Let the countries in the model be the United States and the Rest of the World and the goods be steel and wheat. The two factors of production are capital and land. Further, the United States is capital-abundant and steel production is capital-intensive. Suppose, in the absence of trade, the United States operates at a point on its production-possibility curve where it produces and consumes 20 units of wheat and 20 units of steel. Once it engages in free trade, the international price of one unit of steel is two units of wheat. In response to the opening of trade, the United States moves along its production-possibility curve to a new point where it produces 30 units of steel and 10 units of wheat. Is the United States better-off following the opening of trade? Provide a logical proof of your answer.

Question 48

Using the concepts of community indifference curves and production-possibility curve, explain how the international price of a good is determined in the Heckscher-Ohlin two-goods model. What is the unit of measurement for the price of a good in this model?