Question 1

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

Accepted Answer

The Case of the Missing Trade refers to the fact that factor trade (trade in factors of production) is less than predicted by the Heckscher-Ohlin theory. This is because the model assumes perfect competition and equal access to factor markets, which is not always the case in reality.

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

The answer of Why is it that North-South trade in...

Question 3

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

Accepted Answer

The answer of The 1987 study by Bowen, Leamer and...

Question 4

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. 
-Using the figure above, demonstrate what happens to the composition of production (that is quantity of cloth per 1 unit of food) in Australia once trade is established between the two countries. Which country will export cloth? What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease? Would land owners in Australia lobby for or against free trade? Would land owners in Australia lobby for or against free admittance of immigrant workers?

Accepted Answer

The answer of Suppose Australia, a land (K)-abundant country, and...

Question 5

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

Accepted Answer

The answer of If the price of the capital intensive...

Question 6

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

The answer of Why do you suppose that South-South trade...

Question 7

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

Accepted Answer

Empirical observations on actual North-South trade patterns tend to support the validity of the Heckscher-Ohlin model, which states that countries export goods that use their abundant resources and import goods that use their scarce resources. This has been found to hold true for many North-South trade relationships, where the North tends to export capital-intensive goods and the South tends to export labor-intensive goods. The other options (B, C, D, and E) are not supported by empirical evidence to the same degree as the Heckscher-Ohlin model.

Question 8

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

The answer of Suppose Australia, a land (K)-abundant country, and...

Question 9

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

Accepted Answer

The answer of Countries do not in fact export the...

Question 10

Why are prices of factors of production not equalized?

Accepted Answer

The answer of Why are prices of factors of production...

Question 11

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

Accepted Answer

International trade can lead to winners and losers. Some groups in each country may benefit from increased trade, but other groups may see their wages decrease or lose their jobs altogether. This is because trade allows countries to specialize in producing the goods and services they are most efficient at, but it can also make some domestic industries less competitive. Therefore, while international trade has the potential to increase overall economic growth and welfare, it can also have distributional consequences.

Question 12

Why do we observe the Leontief paradox?

Accepted Answer

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

Question 13

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 capitalists should support U.S.-European free trade.
B) European landowners should support U.S.-European free trade.
C) all capitalists in both countries should support free trade.
D) all landowners should support free trade.
E) the U.S. should compensate European countries once trade commences.

Accepted Answer

The answer of Suppose that there are two factors, capital...

Question 14

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?

Accepted Answer

The answer of The Heckscher-Ohlin model is famous for being...

Question 15

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

Accepted Answer

The answer of If trade opens up between the two...

Question 16

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 rise and rents should fall in H.
B) wages and rents should rise in H.
C) wages and rents should fall in H.
D) wages should fall and rents should rise in H.
E) rent will be unchanged but wages will rise in H.

Accepted Answer

With trade, Country H will specialize in the production of the good that uses relatively more labor (due to its labor abundance) and export it. This will lead to an increase in the demand for labor in H and therefore an increase in wages. At the same time, the demand for land will decrease as it is relatively less abundant in H, leading to a decrease in rents. Therefore, wages should rise and rents should fall in H.

Question 17

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

Accepted Answer

The Leontieff Paradox provided evidence contradicting the predictions of the Heckscher-Ohlin model, which suggested that countries with abundant capital would export capital-intensive goods and import labor-intensive goods. However, Leontieff found that the U.S. was exporting labor-intensive goods and importing capital-intensive goods, which was opposite to the predictions of the model. Thus, the Leontieff Paradox failed to support the validity of the Heckscher-Ohlin model.

Question 18

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

Accepted Answer

The Leontieff Paradox refers to the empirical finding by economist Wassily Leontief that, contrary to the Heckscher-Ohlin theory, U.S. exports were more labor-intensive than its imports, despite the U.S. being a capital-abundant country.

Question 19

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

The answer of Factor-intensity reversals describe a situation in which...

Question 20

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

Accepted Answer

The answer of Factors tend to be specific to certain...

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

The Case of the Missing Trade refers to

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?

The 1987 study by Bowen, Leamer and Sveikauskas

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

Empirical observations on actual North-South trade patterns tend to

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

Why are prices of factors of production not equalized?

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

Why do we observe the Leontief paradox?

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,

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

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

The Leontieff Paradox

The Leontieff Paradox

Factors tend to be specific to certain uses and products