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

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.

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, free trade between countries with different factor endowments (in this case, differences in capital-labor ratios) will lead to an increase in production of the good that uses the abundant factor more intensively (in this case, the United States will produce more automobiles and the Rest of the World will produce more shoes) and a decrease in production of the other good. This will result in an increase in the welfare of both countries since they will be able to consume more of both goods than they would have been able to produce on their own. Therefore, free trade between the United States and the Rest of the World would result in an improvement in economic well-being in both countries.

Assume a Two-Country Two-Good Two-Input Model Where the Following Relationships