Deck 4: The Heckscher-Ohlin Theory

Question 1

Let Kj and Lj denote the capital and labor inputs in the production of good j (j = S,T), then S is said to be capital intensive relative to T if

A) KS > KT.
B) KS/LS > KT/LT.
C) LS < LT.
D) All of the above.

Answer 1

B

Question 2

One of the predictions of the HO model is that

A) countries with different factor endowments but similar technologies and preferences will have a strong basis for trade with each other.
B) countries will tend to specialize, but not completely, in their comparative advantage good.
C) reciprocal demand leads to an equilibrium terms of trade by inducing changes in both demand and supply.
D) All of the above.

Answer 2

D

Question 3

According to the factor price equalization theorem, if B is labor abundant, then once trade B begins with A

A) wages and rents should fall in A.
B) rents and rents should rise in A.
C) wages should rise and rents should fall in A.
D) wages should fall and rents should rise in A.

Answer 3

D

Question 4

The HO model predicts that once trade begins factor prices will equalize between countries. This result occurs because of the assumption of

A) identical technology sets available to each country.
B) constant opportunity costs.
C) one factor of production.
D) free international mobility of factors.

Question 5

If tastes are identical between countries, then comparative advantage is determined by

A) supply conditions only.
B) demand conditions only.
C) supply and demand conditions.
D) Can't tell without more information.

Question 6

According to the Rybczynski theorem, at constant world prices, if a country experiences a gain in its capital stock it will produce

A) more of the capital intensive good and less of the labor intensive good.
B) more of both goods.
C) less of the capital intensive good and more of the labor intensive good.
D) less of both goods.

Question 7

The HO model rules out the classical model's basis for trade by assuming that is (are) identical between countries.

A) factor endowments
B) factor intensities
C) technology
D) opportunity costs

Question 8

According to the Heckscher-Ohlin (HO) model the source of comparative advantage is a country's

A) technology.
B) advertising.
C) factor endowments.
D) Both A and C.

Question 9

Let Kj and Lj denote the capital and labor stocks of country j (j = A,B), then A is said to be capital abundant relative to B if

A) KA > KB.
B) KA/LA > KB/LB.
C) LA < LB.
D) All of the above.

Question 10

In the HO model, the production possibility frontier is bowed out due to the assumption of

A) identical tastes.
B) different factor intensities in the production of the two goods.
C) increasing returns to scale.
D) Two of the above.

Question 11

Which of the following is true?

A) In the HO model complete specialization in the production of exports is a likely outcome of international trade.
B) In the classical model, complete specialization seldom occurs due to the assumption of increasing opportunity costs.
C) Complete specialization is more likely if opportunity costs change little as the production point moves closer to either axis.
D) All of the above are true.

Question 12

Which of the following is true about the distribution of income in the U.S. in the last three decades?

A) For much of this period real wages paid to college graduates have risen significantly.
B) Real wages paid to blue-collar workers have grown only slightly.
C) There has been a shift in the distribution in income across various segments of the economy, with the real earnings of the richest in America rising to record levels.
D) All of the above are true.

Question 13

The HO model assumes that are identical between countries.

A) tastes
B) technology sets
C) factor endowments
D) Both A and B

Question 14

Which of the following is a critical element of the Heckscher-Ohlin model?

A) That different goods display different factor intensities in their production.
B) That some countries have no comparative advantage in anything.
C) That trade may not be beneficial.
D) All of the above.

Question 15

According to the factor price equalization theorem, if A is labor abundant, then once trade opens

A) wages and rents should fall in A.
B) rents and rents should rise in A.
C) wages should rise and rents should fall in A.
D) wages should fall and rents should rise in A.

Question 16

Which of the following is false?

A) International differences in tastes, if sufficiently large, could overturn the comparative advantage predictions of the HO model.
B) The classical and HO models make similar assumptions about international differences in technology.
C) The HO model predicts that some groups will be hurt by international trade.
D) Both the classical and the HO models predict that countries gain from international trade.

Question 17

Suppose that there are two factors, capital and land, and that the United States is relatively capital abundant while Canada is relatively land abundant. According to the HO model,

A) Canadian landowners should support Canada-U.S. free trade.
B) Canadian capitalists should oppose Canada-U.S. free trade.
C) U.S. capitalists should support Canada-U.S. free trade.
D) All of the above.

Question 18

According to the HO model,

A) everyone automatically gains from trade.
B) the gainers from trade outnumber the losers from trade.
C) the scarce factor necessarily gains from trade.
D) None of the above.

Question 19

According to the factor price equalization theorem, the factor should oppose free trade policies in any given country.

A) abundant
B) scarce
C) neither
D) Can't tell without more information

Question 20

The assumption of increasing opportunity costs in the HO model increases the likelihood that

A) there will be incomplete specialization in production after trade begins.
B) countries will be better off with free international trade.
C) countries will maximize their standards of living from free international trade.
D) All of the above.

Question 21

The Heckscher-Ohlin model basically states that countries will specialize and trade those goods in which they have comparative advantage.

Question 22

If the factor price equalization theorem is true then, eventually, U.S. wages will fall to the level found today in the least developed countries of the world.

Question 23

Which of the following theorems predicts that trade benefits the abundant factors of a country and harms the scarce factors?

A) The Stolper-Samuelson theorem.
B) The Rybczynski theorem.
C) The Heckscher-Ohlin theorem.
D) None of the above.

Question 24

France is capital abundant and Italy is labor abundant. Shoes are labor intensive and wheat is capital intensive. Draw diagrams to illustrate the pre- and post-trade equilibria for each of the two countries including the production points, the consumption points, the international price, and the volumes of exports and imports for each. Be sure to identify which country has comparative advantage in which good. Which factors gain and which lose when trade is opened between the two countries? Explain carefully.

Question 25

Explain how free international trade tends to lead to factor price equalization under the assumptions of the HO model? What does this process predict about which groups should be in favor of or opposed to free international trade?

Question 26

According to the Rybczynski theorem, if a country increases its endowment of capital and prices remain constant, then its output of both the capital and labor intensive goods will rise.

Question 27

According to the HO model, countries with different factor endowments but similar technologies and preferences will have a strong basis for trade with each other.

Question 28

The Heckscher-Ohlin model is an alternative to the classical theory of international trade that focuses on the factors of production that countries possess.

Question 29

In the HO model, reciprocal demand leads to an equilibrium price by inducing changes in both demand and supply.

Question 30

Tastes are assumed to be identical across countries to rule out differences in demand determining the direction of trade.

Question 31

Describe the controversy surrounding the HO model and the widening of the American income gap.

Question 32

Explain carefully why the assumption of identical technology worldwide eliminates the classical basis for international trade.

Question 33

The assumption that the two goods are made using different factor intensities raises the likelihood of incomplete specialization after trade begins.

Question 34

According to the factor price equalization theorem, free international trade will result in wages equating rents worldwide.

Question 35

According the Stolper-Samuelson theorem, the scarce factor in any given country should oppose international trade by that country.

Question 36

Even if some people are hurt by international trade, the HO model predicts that free international trade improves the standard of living for the country as a whole.

Question 37

Both the classical and the HO model predict that the pattern of trade is determined largely by international differences in factor endowments.

Question 38

Country A is labor abundant relative to country B if it has a larger labor force than B's.