Question 1

Why are prices of factors of production NOT equalized?

Accepted Answer

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Question 2

Why is it that North-South trade in manufactures seems to be consistent with the results or expectations generated by the factor-proportions theory of international trade, whereas North-North trade is not?

Accepted Answer

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Question 3

Factor-intensity reversals describe a situation in which the production of a product may be land intensive in one country, and relatively labor intensive in another (at given relative wage levels). For example, cotton may be land intensive in the U.S., and labor intensive in Egypt where land is relatively scarce and expensive. Suppose factor-intensity reversals were common. How would that affect the conclusion that a country in which land is relatively scarce will not be the country with a comparative advantage in the land-intensive product?

Accepted Answer

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Question 4

Empirical observations on actual North-South trade patterns tend to
A) support the validity of the Rybczynski Theorem.
B) support the validity of the wage equalization theorem.
C) support the validity of the neo-imperialism exploitation theory.
D) support the validity of the Leontief Paradox.
E) support the validity of the Heckscher-Ohlin model.

Accepted Answer

Empirical observations on actual North-South trade patterns tend to support the validity of the Heckscher-Ohlin model. This is because the model predicts that countries will specialize in and export goods that use their abundant factor of production and import goods that use their scarce factor of production. In the case of North-South trade, the North is typically abundant in capital and skilled labor while the South is abundant in unskilled labor. Empirical evidence shows that the North exports capital-intensive goods while the South exports labor-intensive goods, which supports the predictions of the Heckscher-Ohlin model.

Question 5

Countries do not in fact export the goods the H.O. theory predicts. Discuss.

Accepted Answer

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Question 6

The Leontief Paradox
A) proved that the U.S. economy is different from all others.
B) failed to support the validity of the Ricardian theory.
C) supported the validity of the Ricardian theory of comparative advantage.
D) supported the validity of the Heckscher-Ohlin model.
E) failed to support the validity of the Heckscher-Ohlin model.

Accepted Answer

The Leontief Paradox failed to support the validity of the Heckscher-Ohlin model, which predicted that a country abundant in a particular factor of production (such as the U.S. and capital) would export goods that use that factor intensively and import goods that use other factors intensively. However, Leontief found that the U.S. was actually importing goods that were more capital-intensive than the goods it was exporting, contradicting the predictions of the Heckscher-Ohlin model.

Question 7

If two countries are very different in relative factor abundance, then empirical support for which of the following would be 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 is a specific consequence of the Heckscher-Ohlin Theorem, which states that countries will specialize in producing and exporting goods that use their abundant factors of production relatively intensively, and import goods that use their scarce factors intensively. This specialization and trade pattern will eventually lead to equalized relative factor prices between countries. However, if two countries have very different factor endowments, it is less likely that factor prices will equalize, and thus the Factor Price Equalization Theorem may not hold. The other options are not directly related to relative factor abundance and are therefore less affected by differences in factor endowments.

Question 8

The Case of the Missing Trade refers to
A) the fact that world exports does not equal world imports.
B) the 9th volume of the Hardy Boys' Mystery series.
C) the fact that factor trade is less than predicted by the Heckscher-Ohlin theory.
D) the fact that the Heckscher Ohlin theory never applies to China-U.S. trade practices.
E) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists.

Accepted Answer

The Case of the Missing Trade refers to the fact that factor trade (trade in factors of production such as labor and capital) is less than predicted by the Heckscher-Ohlin theory. This poses a challenge to the theory's ability to explain patterns of international trade.

Question 9

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.
 
-Refer to above figure. Imagine that the relative capital abundance of Australia was so much greater than that of Sri Lanka, that we would have to locate Australia far to the right on the K/L axis. If this were so far to the right that there was no area of overlap on the w/r axis, then what product would Australia export? Which product will each of the trade partners export? Will the relative wages as calculated now be the same or different in both Australia and Sri Lanka?

Accepted Answer

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Question 10

Factors tend to be specific to certain uses and products
A) in capital-intensive industries.
B) in labor-intensive industries.
C) in the short run.
D) in countries lacking fair labor laws.
E) in countries lacking comparative advantage.

Accepted Answer

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Question 11

If the price of the capital -intensive product rises more than does the price of the land- intensive product, then
A) demand will shift away from the capital-intensive product, and its production will decrease.
B) the relative price of the capital-intensive product will fall to some point between the pretrade relative prices.
C) the country that exports the capital-intensive good will lose its comparative advantage.
D) demand will shift away from the capital-intensive product, and its production will decrease relative to that of the land-intensive product.
E) the production of the capital-intensive product will decrease, but by less than production of the land-intensive product.

Accepted Answer

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Question 12

Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. According to the Heckscher-Ohlin model
A) European landowners should support U.S.-European free trade.
B) the U.S. should compensate European countries once trade commences.
C) European capitalists should support U.S.-European free trade.
D) all landowners should support free trade.
E) all capitalists in both countries should support free trade.

Accepted Answer

According to the Heckscher-Ohlin model, countries will export the good that uses their abundant factor of production intensively and import the good that uses their scarce factor of production intensively. Therefore, European countries which are relatively capital-endowed will gain more from international trade if they can export capital-intensive goods to the United States, which is relatively land-endowed. Hence, European capitalists should support U.S.-European free trade.

Question 13

International trade has strong effects on income distributions. Therefore, international trade
A) will be beneficial to all those engaged in international trade.
B) will tend to hurt one trading country.
C) will tend to hurt everyone in both countries.
D) will tend to hurt some groups in each trading country.
E) is beneficial to everyone in both trading countries.

Accepted Answer

International trade can benefit some groups in each trading country while hurting others. For example, trade may benefit producers who can export their products and capture larger markets abroad, but it may hurt domestic producers who face increased competition from cheaper imports. Similarly, trade may benefit consumers who have access to cheaper imported goods, but it may hurt workers who face job displacement or wage pressure from import competition. Therefore, the effects of trade on income distributions are not uniform and depend on the specific context of each country and group.

Question 14

Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins
A) wages should fall and rents should rise in H.
B) wages and rents should fall in H.
C) wages should rise and rents should fall in H.
D) rent will be unchanged but wages will rise in H.
E) wages and rents should rise in H.

Accepted Answer

According to the Heckscher-Ohlin model, a labor-abundant country like H will export labor-intensive goods and import capital-intensive goods once trade begins. This will increase the demand for labor in H, leading to a rise in wages. At the same time, the supply of capital will increase relative to labor, leading to a fall in rents. Therefore, wages should rise and rents should fall in H.

Question 15

If trade opens up between the two formerly autarkic countries, Australia and Belgium, then
A) the real income of both countries will increase.
B) the real income of neither country will increase.
C) the real income of Australia but not of Belgium will increase.
D) the real income of Australia and of Belgium will increase.
E) the real income of both countries may increase.

Accepted Answer

When trade opens up between two formerly autarkic countries, both countries can benefit and increase their real income. This is because they can specialize in producing goods that they have a comparative advantage in and trade with each other. This leads to an increase in efficiency and overall output, which can lead to an increase in income for both countries. However, the specific outcomes depend on various factors such as the terms of trade, the competitiveness of each country's industries, and the level of demand for their goods in the global market. Therefore, it is possible that the real income of both countries may increase, making option E the best choice.

Question 16

Why do you suppose that South-South trade does NOT conform in volume, but does conform in pattern with expectations generated by the Heckscher-Ohlin model?

Accepted Answer

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Question 17

The Heckscher-Ohlin model is famous for being elegant and mathematically sophisticated, yet failing to describe reality. One manifestation of this fact is Trefler's Case of Missing Trade. Explain what exactly is missing. In what sense is it missing? How would you explain why it is missing? How can a relaxation of the identical production functions explain the case of the missing trade? How did the results obtained by Davis and Weinstein strengthen support for the validity of the HO model?

Accepted Answer

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Question 18

The 1987 study by Bowen, Leamer and Sveikauskas
A) proved that the U.S.'s comparative advantage relied on skilled labor.
B) supported the validity of the Leontief Paradox.
C) supported the validity of the Heckscher-Ohlin model.
D) demonstrated that in fact countries tend to use different technologies.
E) used a two-country and two-product framework.

Accepted Answer

The 1987 study by Bowen, Leamer, and Sveikauskas supported the validity of the Leontief Paradox, which is a finding that contradicts the expectations of the Heckscher-Ohlin model by showing that the U.S. (which was capital-abundant) exported labor-intensive commodities and imported capital-intensive commodities.

Question 19

The Leontief Paradox
A) still accurately applies to today's pattern of U.S. international trade.
B) refers to the fact that Leontief-an American economist-had a Russian name.
C) refers to the finding that the U.S. produces outside its Edgeworth Box.
D) refers to the finding that U.S. exports were more labor intensive than its imports.
E) refers to the finding that U.S. Exports were more capital intensive than its exports.

Accepted Answer

The Leontief Paradox refers to the finding that U.S. exports were more labor intensive than its imports, which contradicted the predictions of the Heckscher-Ohlin model. This finding was based on Leontief's empirical research in the 1950s, and while there have been changes in U.S. trade patterns since then, the paradox still holds true to a large extent.

Question 20

Why do we observe the Leontief paradox?

Accepted Answer

The answer of Why do we observe the Leontief paradox?...

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

Why are prices of factors of production NOT equalized?

Why is it that North-South trade in manufactures seems to be consistent with the results or expectations generated by the factor-proportions theory of international trade, whereas North-North trade is not?

Empirical observations on actual North-South trade patterns tend to

Countries do not in fact export the goods the H.O. theory predicts. Discuss.

The Leontief Paradox

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

The Case of the Missing Trade refers to

Factors tend to be specific to certain uses and products

If the price of the capital -intensive product rises more than does the price of the land- intensive product, then

Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. According to the Heckscher-Ohlin model

International trade has strong effects on income distributions. Therefore, international trade

Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins

If trade opens up between the two formerly autarkic countries, Australia and Belgium, then

Why do you suppose that South-South trade does NOT conform in volume, but does conform in pattern with expectations generated by the Heckscher-Ohlin model?

The 1987 study by Bowen, Leamer and Sveikauskas

The Leontief Paradox

Why do we observe the Leontief paradox?