Question 1

The factor proportions model assumes that the residents of the two nations have different tastes for the two goods.

Accepted Answer

The factor proportions model assumes that each nation has a fixed endowment of capital and labor, and that they use these factors of production to produce two goods. It does not assume different tastes between nations.

Question 2

________________ is the revenue received by the firm less the costs of the intermediate goods it purchased.

Accepted Answer

Value added is the revenue received by the firm after subtracting the costs of the intermediate goods that it purchased. It reflects the value that the company adds to the production process.

Question 3

Canada has 5,000 labor units and 2,500 capital units, while Mexico has 500 labor units and 200 capital units. The production of a car requires 200 labor units and 300 capital units. The production of a guitar requires 10 labor units and 12 capital units. According to the Heckscher-Ohlin Theorem:

Accepted Answer

According to the Heckscher-Ohlin Theorem, a country will export the good that uses its abundant factor intensively and import the good that uses its scarce factor intensively. In this case, Canada has relatively more capital units than labor units, while Mexico has relatively more labor units than capital units. Therefore, Canada will export the good that uses capital intensively (cars) and import the good that uses labor intensively (guitars) from Mexico. Hence, the correct choice is C - Canada will export cars to Mexico and import guitars from Mexico.

Question 4

Computers are relatively capital intensive in their production, while wool is relatively labor intensive. Australia is relatively capital abundant and New Zealand is relatively labor abundant. According to the Heckscher-Ohlin theorem:

Accepted Answer

The Heckscher-Ohlin theorem states that countries will export goods that use their abundant factor of production, while importing goods that use their scarce factor of production. Since Australia is capital abundant and computers are capital intensive, we would expect Australia to export computers to New Zealand. On the other hand, New Zealand is labor abundant and wool is labor intensive, so we would expect them to export wool to Australia.

Question 5

Computers are relatively capital intensive in their production, while wool is relatively labor intensive. Australia is relatively capital abundant and New Zealand is relatively labor abundant. According to the Heckscher-Ohlin theorem and the factor price equalization theorem:

Accepted Answer

According to the Heckscher-Ohlin theorem, a country will export goods that use its abundant factor intensively. Australia, being capital abundant, will export capital-intensive goods like computers, increasing the demand for capital and thus raising the return to capital relative to labor.

Question 6

Germany, a relatively capital abundant nation, has extensive trade ties with South Korea, a relatively labor abundant nation. As free trade expands between the two nations, the Stolper-Samuelson theorem would predict that:

Accepted Answer

The Stolper-Samuelson theorem predicts that in a capital-abundant country like Germany, free trade will increase the return to the abundant factor (capital) and decrease the return to the scarce factor (labor).

Question 7

Watches are relatively capital intensive in their production process, while handbags are relatively labor intensive. Switzerland is a relatively capital abundant nation. If Switzerland experiences an increase in its labor endowment then, according to the Rybczynski theorem, we would expect:

Accepted Answer

The answer of Watches are relatively capital intensive in their...

Question 8

Switzerland produces both watches and chocolate. Watches are relatively capital intensive in their production, while chocolate is relatively labor intensive. If Switzerland experiences an increase in its labor endowment, according to the Rybczynski theorem:

Accepted Answer

The Rybczynski theorem states that, at constant product prices, an increase in the endowment of a factor (in this case, labor) will lead to an increase in the output of the good for which that factor is intensively used (chocolate, which is labor-intensive) and a decrease in the output of the other good (watches, which are capital-intensive).

Question 9

Switzerland exports watches to Russia. Watches are relatively capital intensive in their production process. With trade, the price of watches rises by 10 percent in Switzerland. According to the magnification principle:

Accepted Answer

According to the magnification principle, the price effect of a change in the price of a good will magnify throughout the production process, and affect the prices of other factors of production. Since watches are capital-intensive, a 10% increase in the price of watches would likely result in a higher increase in the price of capital in Switzerland, as capital is a key input in the production of watches. Therefore, we would expect the price of capital to rise by more than 10 percent in Switzerland.

Question 10

A production strategy in which one organization hires another organization to manufacture a good under the hiring firm-s name and to the hiring firm-s specifications is known as ________________.

Accepted Answer

This is the definition of contract manufacturing, in which the hiring firm contracts another organization (the manufacturer) to produce a good according to their specifications and under their brand name. Outsourcing refers to the practice of contracting out certain functions or tasks to external parties, which could include contract manufacturing but is not limited to it. Diagonal integration is not a commonly used term in the context of production strategy, and value added is a concept relating to the increase in value that a company adds to a product or service as it goes through the production process.

Question 11

A strategy in which one organization hires another organization to complete a particular stage of the production process is known as ____________________.

Accepted Answer

Outsourcing is when a company hires another organization to perform a specific task or stage in the production process.

Question 12

According to the Stolper-Samuelson theorem, free trade raises the real return of the nation-s ___________________.

Accepted Answer

The Stolper-Samuelson theorem states that free trade raises the real return of the nation's relatively abundant factor and lowers the real return of the relatively scarce factor. Therefore, choice A is correct as it aligns with the theorem.

Question 13

The Heckscher-Ohlin theorem is consistently supported by empirical studies.

Accepted Answer

Empirical studies have not consistently supported the Heckscher-Ohlin theorem. Some studies have found evidence consistent with the model's predictions, while others have found empirical evidence in contrast to the model's predictions.

Question 14

If nation A has more labor units than nation B, then nation A is referred to as the relatively labor-abundant nation.

Accepted Answer

The answer of If nation A has more labor units...

Question 15

According to the Heckscher-Ohlin explanation of trade, the country that is relatively labor abundant will import relatively labor-intensive goods.

Accepted Answer

According to the Heckscher-Ohlin explanation of trade, the country that is relatively labor abundant will export relatively labor-intensive goods, not import them.

Question 16

In 1954, Wassily Leontief provided empirical evidence showing that the United States- pattern of trade was inconsistent with the Heckscher-Ohlin theorem.

Accepted Answer

Wassily Leontief's study showed that the United States was exporting more labor-intensive goods than predicted by the Heckscher-Ohlin theorem, which predicts that countries will export goods that use their abundant factor of production, such as labor for the US. Therefore, it was inconsistent with the Heckscher-Ohlin theorem.

Question 17

The good that uses more capital in its production process than the other good is referred to as the capital-intensive good.

Accepted Answer

The answer of The good that uses more capital in...

Question 18

Factor price equalization can occur even if factors of production are not mobile internationally.

Accepted Answer

Factor price equalization can occur through trade, as specialization and comparative advantage lead to countries exporting goods that use their abundant factors of production, and importing goods that use their scarce factors. This results in convergence of factor prices across countries, even without actual physical movement of factors of production.

Question 19

Economic growth spurred by either a technological advance or an increase in resources will equally favor both sectors in an economy.

Accepted Answer

Economic growth spurred by a technological advance or an increase in resources may not equally favor both sectors in an economy. For example, if the technological advance is specifically targeted towards a certain sector such as manufacturing, then it may benefit that sector more than others. Similarly, if the increase in resources is in the form of oil or natural gas, it may benefit the energy sector more than others. Therefore, the impact of economic growth may not be evenly distributed across sectors in an economy.

Question 20

Economic growth always leads to an increase in international trade.

Accepted Answer

Economic growth can lead to an increase in international trade, but it is not a guaranteed outcome. Factors such as trade policies, the nature of the economic growth, and the global economic environment can influence the relationship between economic growth and international trade.

Quiz 3: Sources of Comparative Advantage