Question 1

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

Accepted Answer

The Heckscher-Ohlin model actually states that countries will specialize and export goods that require resources (factors of production) that are relatively abundant and import goods that require resources that are relatively scarce. It focuses on the differences in factor endowments between countries, rather than differences in productivity.

Question 2

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.

Accepted Answer

The factor price equalization theorem states that if there is free trade and all countries have access to the same technology and resources, then factor prices (such as wages) will equalize between countries. However, this does not necessarily mean that wages in developed countries will fall to the level found in less developed countries. There are other factors at play, such as differences in productivity, education levels, and institutional factors, that can affect wages.

Question 3

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.

Accepted Answer

The Stolper-Samuelson theorem predicts that trade benefits the abundant factors of a country (those that are used intensively in industries that are intensive in the country's abundant factor) and harms the scarce factors (those that are used intensively in industries that are intensive in the country's scarce factor). The Rybczynski theorem, on the other hand, predicts that an increase in the endowment of a factor of production in a country will lead to an increase in the output of the product that uses that factor intensively and a decrease in the output of the other product. The Heckscher-Ohlin theorem predicts that countries will export goods that use their abundant factor intensively and import goods that use their scarce factor intensively.

Question 4

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.

Accepted Answer

The answer of France is capital abundant and Italy is...

Question 5

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?

Accepted Answer

The answer of Explain how free international trade tends to...

Question 6

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.

Accepted Answer

According to the Rybczynski theorem, if a country increases its endowment of capital (holding prices constant), the output of the capital-intensive good will increase, while the output of the labor-intensive good will decrease.

Question 7

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.

Accepted Answer

According to the HO model, countries with different factor endowments (such as natural resources or labor) but similar technologies and preferences will have a comparative advantage in producing certain goods, leading to a basis for trade with each other.

Question 8

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

Accepted Answer

The statement is true. The Heckscher-Ohlin model suggests that a country will specialize in producing and exporting goods that require factors of production that it has in abundance.

Question 9

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

Accepted Answer

Reciprocal demand means that the demand for each country's goods depends on the price of the other country's goods. When the price of one country's goods changes, it can result in a change in the demand for the other country's goods, which affects the supply of that country's goods. Therefore, changes in reciprocal demand can lead to changes in both demand and supply, ultimately resulting in an equilibrium price.

Question 10

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

Accepted Answer

The answer of Tastes are assumed to be identical across...

Question 11

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

Accepted Answer

The answer of Describe the controversy surrounding the HO model...

Question 12

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

Accepted Answer

The answer of Explain carefully why the assumption of identical...

Question 13

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

Accepted Answer

If the two goods are made using different factor intensities, then it is more likely that one country will have a comparative advantage in one good and the other country will have a comparative advantage in the other good. This can lead to incomplete specialization, where both countries continue to produce some of both goods even after trade begins.

Question 14

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

Accepted Answer

The factor price equalization theorem suggests that free trade will lead to the equalization of the prices of factors of production (like wages for labor and rents for land) across countries, but it does not guarantee that wages will equate to rents. Instead, it implies that wages will become more similar across countries, as will rents, but not that wages will equal rents within or across countries.

Question 15

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

Accepted Answer

The Stolper-Samuelson theorem states that when a country opens up to international trade, the owners of the abundant factor of production benefit while the owners of the scarce factor lose. Therefore, the scarce factor in any given country should oppose international trade by that country.

Question 16

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.

Accepted Answer

The HO model suggests that even if some people are hurt by international trade, the benefits to the country as a whole outweigh the costs, resulting in an improvement in overall standard of living.

Question 17

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

Accepted Answer

The answer of Both the classical and the HO model...

Question 18

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

Accepted Answer

The ratio of labor to capital determines abundance.

Quiz 4: The Heckscher-Ohlin Theory