Chapter 4: Resources and Trade: The Heckscher-Ohlin Model 1.

In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would A. move the oint of roduction along the roduction ossibilit! curve. ". shift the roduction ossibilit! curve outward, and increase the roduction of both goods. #. shift the roduction ossibilit! curve outward and decrease the roduction of the labor-intensive roduct. $. shift the roduction ossibilit! curve outward and decrease the roduction of the ca ital-intensive roduct. %. &one of the above. Answer' $ 2. In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in A. tastes. ". militar! ca abilities. #. si(e. $. relative availabilities of factors of roduction. %. labor roductivities. Answer' $ ). In the 2-factor, 2 good Heckscher- Ohlin model, a change from autark! *no trade+ to trade will benefit the owners of A. ca ital. ". the relativel! abundant factor of roduction. #. the relativel! scarce factor of roduction. $. the relativel! inelastic factor of roduction %. the factor of roduction with the largest elasticit! of substitution. Answer' " ,. In the 2-factor, 2 good Heckscher- Ohlin model, a change from autark! *no trade+ to trade A. will tend to make the wages in both countries more similar. ". will e-uali(e the wages in both countries. #. will tend to make the wages in both countries less similar. $. will tend to make wages e-ual to returns to ca ital. %. will tend to make rents e-ual to interest rates. Answer' A

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.. /he 0eontieff 1aradox A. su orted the validit! of the 2icardian theor! of com arative advantage. ". su orted the validit! of the Heckscher-Ohlin model. #. failed to su ort the validit! of the 2icardian theor!. $. failed to su ort the validit! of the Heckscher-Ohlin model. %. roved that the 3.4. econom! is different from all others. Answer' $ 5. /he 0eontieff 1aradox A. refers to the finding that 3.4. ex orts were more labor intensive than its im orts. ". refers to the finding that 34. %x orts were more ca ital intensive than its ex orts. #. refers to the finding that the 3.4. roduces outside its %dgeworth "ox. $. still accuratel! a lies to toda!6s attern of 3.4. international trade. %. refers to the fact that 0eontieff - an American economist 7 had a 2ussian name. Answer' A 8. /he 19:8 stud! b! "owen, 0eamer and 4veikauskas A. su orted the validit! of the 0eontieff 1aradox. ". su orted the validit! of the Heckscher-Ohlin model. #. used a two-countr! and two- roduct framework. $. demonstrated that in fact countries tend to use different technologies. %. roved that the 3.4.6s com arative advantage relied on skilled labor. Answer' A :. %m irical observations on actual &orth-4outh trade atterns tend to A. su ort the validit! of the 0eontieff 1aradox. ". su ort the validit! of the Heckscher-Ohlin model. #. su ort the validit! of the 2!bc(!nski /heorem. $. su ort the validit! of the wage e-uali(ation theorem. %. su ort the validit! of the neo-im erialism ex loitation theor!. Answer' "

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9. /he #ase of the ;issing /rade refers to A. the 9th volume of the Hard! "o!s6 ;!ster! series. ". the fact that world ex orts does not e-ual world im orts. #. the fact that factor trade is less than redicted b! the Heckscher-Ohlin theor!. $. the fact that the Heckscher Ohlin theor! redicts much less volume of trade than actuall! exists. %. &one of the above. Answer' # 1<. If the 3nted 4tates had relativel! more ca ital er worker than ;exico, and if the 0eontieff 1aradox a lied to this trade, then a successful ex ansion of trade under &A=/A between ;exico and the 3nited 4tates would tend to benefit which grou in the 3nited 4tates> A. %nvironmentalists ". #a italists #. ?orkers $. 0and owners %. 4killed labor with relativel! high levels of human ca ital Answer' # 11. According to the Heckscher-Ohlin model, the source of com arative advantage is a countr!6s A. technolog!. ". advertising. #. human ca ital. $. factor endowments. %. "oth A and ". Answer' $ 12. /he Hechscher-Ohlin model states that a countr! will have a com arative advantage in the good or service whose roduction is relativel! intensive in the @@@@@@ with which the countr! is relativel! abundant. A. tastes. ". technolog!. #. factor of roduction. $. o ortunit! cost. %. scale econom!. Answer' #

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1). One wa! in which the Heckscher-Ohlin model differs from the 2icardo model of com arative advantage is b! assuming that @@@@@@@@@@ is *are+ identical in all countries. A. factor of roduction endowments ". scale economies #. factor of roduction intensities $. technolog! %. o ortunit! costs Answer' $ 1,. According to the Hecksher-Ohlin model, A. ever!one automaticall! gains from trade ". the scarce factor necessaril! gains from trade #. the gainers could com ensate the losers and still retain gains. $. a countr! gains if its ex orts have a high value added. %. &one of the above. Answer' # 1.. /he Heckscher-Ohlin model assumes that @@@@@ are identical in all trading countries A. tastes ". technologies #. factor endowments $. "oth A. and ". %. &one of the above. Answer' " 15. As o osed to the 2icardian model of com arative advantage, the assum tion of diminishing returns in the Heckscher-Ohlin model means that the robabilit! is greater that with trade A. countries will not be full! s eciali(ed in one roduct. ". countries will benefit from free international trade. #. countries will consume outside their roduction ossibilit! frontier. $. com arative advantage is rimaril! su l! related. %. &one of the above. Answer' A

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18. 4tarting from an autark! *no-trade+ situation with Heckscher-Ohlin model, if #ountr! H is relativel! labor abundant, then once trade begins A. wages and rents should rise in H ". wages and rents should fall in H #. wages should rise and rents should fall in H. $. wages should fall and rents should rise in H. %. &one of the above. Answer' # 1:. ?hich of the following is false *for the Heckscher-Ohlin model+> A. If tastes are not identical in both countries, wages ma! still e-uali(e. ". $ifferences in technologies could be the source of gains from trade. #. 4ome grou s ma! gain and some ma! lose due to trade. $. Aains for the trade-related winners will tend to be larger than losses of losers. %. &one of the above. Answer' " 19. If tastes differed between countries, this could affect A. wage e-uali(ation due to trade with no s eciali(ation. ". the direction of trade *who ex orts what to whom+. #. the fact that some grou s in a countr! might lose welfare due to trade. $. the fact that the countr! as a whole will gain from trade. %. &one of the above. Answer' " 2<. 4u ose that there are two factors, ca ital and land, and that the 3nited 4tates is relativel! land endowed while the %uro ean 3nion is relativel! ca ital-endowed. According to the Heckscher-Ohlin model, A. %uro ean landowners should su ort 34-%uro ean free trade. ". %uro ean ca italists should su ort 34-%uro ean free trade. #. all ca italists in both countries should su ort free trade. $. all landowners should su ort free trade. %. &one of the above. Answer' "

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21. According to the Heckscher-Ohlin model, if the 3nited 4tates is richl! endowed in human-ca ital relative to ;exico, then as &A=/A increasingl! leads to more bilateral free trade between the two countries, A. the 3nited 4tates will find its industrial base sucked into ;exico. ". ;exico will find its relativel! highl! skilled workers drawn to the 3nited 4tates. #. /he wages of highl! skilled 3.4. workers will be drawn down to ;exican levels. $. /he wages of highl! skilled ;exican workers will rise to those in the 3nited 4tates. %. /he wages of highl! skilled ;exican workers will fall to those in the 3nited 4tates. Answer' % 22. Assume that onl! two countries, A and ", exist. #onsider the following data' =actor %ndowments 0abor =orce #a ital 4tock #ountries A " ,. 1. 2< 1<

If good 4 is ca ital intensive, then following the Heckscher-Ohlin /heor!, A. ". #. $. %. countr! A will ex ort good 4. countr! " will ex ort good 4. both countries will ex ort good 4. trade will not occur between these two countries. Insufficient information is given.

Answer' " 2). #ontinuing from Buestion C22, if !ou are told that #ountr! " is very much richer than #ountr! A, then the correct answer is' A. countr! A will ex ort good 4. ". countr! " will ex ort good 4. #. both countries will ex ort good 4. $. trade will not occur between these two countries. %. insufficient information is given. Answer' "

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#ontinuing from Buestion C22, !ou are told that #ountr! " is ver! much larger than countr! A. /he correct answer is' A. countr! A will ex ort good 4. ". countr! " will ex ort good 4. #. both countries will ex ort good 4. $. trade will not occur between these two countries. %. insufficient information is given. Answer' "

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#ontinuing from Buestion C22, !ou are told that #ountr! " has no minimum wage or child labor laws. &ow the correct answer is' A. countr! A will ex ort good 4. ". countr! " will ex ort good 4. #. both countries will ex ort good 4. $. trade will not occur between these two countries. %. Insufficient information is given. Answer' "

25. #ontinuing from Buestion C22, !ou now are told that the labor unions re resenting the workers in each of the two res ective countries are considering lobb!ing against the o ening of international trade between these two countries. &ote that workersD income is derived solel! from wages. A. /his would be a misguided decision from the view oint of the workers in both countries, since trade is alwa!s better than autark!. ". /his would be a good decision from the view oint of workers in #ountr! A since international trade hel s the ca italists and hurts the workers. #. /his would be a good decision from the view oint of workers in #ountr! " since international trade hel s the ca italists and hurts the workers. $. /his would be a good decision for both unions since trade hurts workers wherever the! live. %. &one of the above. Answer' #

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28. ?e are now told that the information given us in Buestion C22 was not exactl! accurate, and that in fact 4 is relativel! ca ital intensive onl! when relative wages are high, but becomes relativel! labor intensive when relative wages are low. Aiven this information' A. countr! A will ex ort good 4. ". countr! " will ex ort good 4. #. both countries will ex ort good 4. $. trade will not occur between these two countries. %. Insufficient information is given. Answer' % 2:. /he following are all assum tions that must be acce ted in order to a l! the Heckscher-Ohlin /heor!, exce t for one' A. countries differ in their endowments of factors of roduction. ". countries differ in their technologies. #. there are two factors of roduction. $. roduction is subEect to constant returns to scale. %. one roduct alwa!s re-uires more machines er worker in its roduction than does the other roduct. Answer' " 29. In international-trade e-uilibrium in the Heckscher-Ohlin model, A. the ca ital rich countr! will charge less for the ca ital intensive good than the rice aid b! the ca ital oor countr! for the ca ital-intensive good. ". the ca ital rich countr! will charge the same rice for the ca ital intensive good as that aid for it b! the ca ital oor countr!. #. the ca ital rich countr! will charge more for the ca ital intensive good than the rice aid b! the ca ital oor countr! for the ca ital-intensive good. $. the workers in the ca ital rich countr! will earn more than those in the oor countr!. %. the workers in the ca ital rich countr! will earn less than those in the oor countr!. Answer' "

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)<. If two countries were ver! different in their relative factor availabilities, then we would not ex ect which of the following to be em iricall! su orted> A. /he Heckscher - Ohlin /heorem ". /he =actor 1rice %-uali(ation /heore. #. /he 0aw of One 1rice $. /he 0aw of $emand %. &one of the above. Answer' " )1. ?hen #ountr! A roduces both goods more efficientl! than #ountr! ", then A. countr! A should roduce both goods and not trade. ". countr! A should s eciali(e in its good of least absolute disadvantage. #. both countries would benefit from autark!. $. both countries ma! not benefit from trade. %. &one of the above. Answer' % )2. /he minimum information re-uired to determine #ountr! ADs com arative advantage is A. the number of hours of labor in the econom! of A. ". ratio of labor in uts for roducts 4 and / in A. #. total available labor, labor re-uired er unit of 4, and labor re-uired er unit of / in A. $. total available labor and the ratio of labor in uts for 4 and / in A. %. &one of the above. Answer' % )). /he slo e of a countr!Ds 11= reflects A. the o ortunit! cost of roduct 4 in terms of roduct /. ". the o ortunit! cost of / in terms of mone! rices. #. the o ortunit! cost of 4 or / in terms of 4. $. "oth A and ". %. "oth A and #. Answer' A

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),. /he Heckscher-Ohlin model redicts all of the following exce t' A. which countr! will ex ort which roduct. ". which factor of roduction within each countr! will gain from trade. #. the volume of trade. $. that wages will tend to become e-ual in both trading countries. %. &one of the above. Answer' # ).. /he Heckscher-Ohlin model differs from the 2icardian model of #om arative Advantage in that the former A. has onl! two countries. ". has onl! two roducts. #. has two factors of roduction. $. has two roduction ossibilit! frontiers *one for each countr!+. %. &one of the above. Answer' #

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Essay Questions 1. FA good cannot be both land- and labor-intensive.G $iscuss.

Answer' In a two good, two factor model, such as the original Heckscher-Ohlin framework, the factor intensities are relative intensities. Hence, the relevant statistic is either workers er acre *or acres er worker+H or wage er rental unit *or rental er wage+. In order to illustrate the logic of the statement above, let us assume that the roduction of a broom re-uires , workers and 1 acre. Also, let us assume that the roduction of one bushel of wheat re-uires ,< workers and :< acres. In this case the acres er erson re-uired to roduce a broom is one -uarter, whereas to roduce a bushel of wheat re-uires 2 acres er erson. /he wheat is therefore *relativel!+ land intensive, and the broom is *relativel!+ labor intensive. 2. F&o countr! is abundant in ever!thing.G $iscuss.

Answer' the conce t of relative *countr!+ factor abundance is *like factor intensities+ a relative conce t. ?hen we identif! a countr! as being ca ital intensive, we mean that it has more ca ital er worker than does the other countr!. If one countr! has more ca ital worker than another, it is an arithmetic im ossibilit! that it also has more workers er unit ca ital. ). /here is fre-uentl! a conflict between short-term and long-term interests in trade. $iscuss.

Answer' In trade models, the short term is t! icall! defined as that *conce tual+ eriod of time in which both the technolog! and the amount of factors of roduction are given and cannot be changed. ?hen we state that free trade can be shown to be an o timal olic! under certain circumstances, we mean that in the short run, this olic! can bring a countr! to an o timum level of consum tion. However, there is no inconsistenc! in the ro osition that the o timum short run solution ma! not be the solution, which maximi(es the likelihood of economic ex ansion or growth *the long run+. =or exam le, a olic! which maximi(es consum tion ma! not take into account inter-tem oral references, and hence ma! Ishort-changeI future generations *or those who care for future generations+.

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International trade leads to com lete e-uali(ation of factor rices. $iscuss.

Answer' /his statement is t! icall! ItrueJbutI. 3nder a strict and limited set of assum tions, such as the original Heckscher-Ohlin model which excludes countr! s ecific technologiesH non- homothetic tastesH factor intensit! reversalsH large countr! differences in *relative+ factor abundances, and more factors than goods, then it ma! be demonstrated that internal consistenc! demands that the above stated sentence is ItrueI. However, the minute one relaxes an! of the above listed assum tions one ma! easil! identif! solutions, which contradict the factor rice e-uali(ation theorem. .. #ountries that are willing to tolerate an unusuall! high -uantit! of ollution relative to their su lies of other factors would tend to ex ort F ollution-intensiveG goods. $iscuss using the Hechscher-Ohlin *H.O.+ model.

Answer' /his statement is badl! crafted. It seems to im l! that ollution er sa! is a ro er factor of roduction. /hat is, Eust as if !ou add a worker, !ou get additional roduct, so the marginal roduct of ollution is ositive. /he roblem here is that ollution is not reall! a factor of roduction, but rather an externalit!, which ma! be more t! ical of im orted goods than ex orted ones. In such a case, the statement above is false. 5. #ountries do not in fact ex ort the goods the H.O. theor! redicts. $iscuss.

Answer' /his statement is not true. Although one ma! find man! cases where it seems to be true *e.g. the Leontieff Paradox+, all one needs to do in order to render the above statement not *generall!+ true is to find one counter exam le. In fact, one can find large subsets of agricultural and commodit! roducts in which the H.O redictions are generall! fulfilled. 0abor-intensive countries such as "angladesh do in fact ex ort relativel! labor-intensive goods. #a ital-intensive countries such as Aerman! do in fact ex ort ca ital-intensive roducts *at least to 4outh countries+. #ountries such as #osta 2ica *Isunshine abundantI+ tend to ex ort bananas *sunshine-intensive roducts+. /he 3.4. *a wheat-land -abundant countr!+ does indeed ex ort wheat * a wheat-land intensive roduct+. In fact, since the earl! 19:<s, the Leontieff Paradox was not found to describe the 3.4. trade data *hence ratif!ing the H.O. theor!+. 8. ?h! is the H.O. model called the factor- ro ortion theor!>

Answer' /he H.O. model ex lores the nature and the limitations of assuming that the sole determinant of com arative advantage is inter-countr! differences in *relative+ factor ro ortions.

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?h! do we observe the 0eontief aradox>

Answer' /here are man! ossible answers. /he! ma! be classified into three grou s. One would argue that the model, or theor! is wrong. /he other would argue that the theor! is correct *internall! consistent and descri tive of real world data+, but the real world data is incorrectl! erceived, defined or measured. /he third would argue that the statement itself is wrong, and that in fact the 0eontieff aradox itself is not actuall! observed, but rather is due to fault! logical rendering of the original model. 9. ?h! are rices of factors of roduction not e-uali(ed>

Answer' Again this statement ma! or ma! not be argued to be true. On the one hand, the large volume and growth in world trade between the 3nited 4tates and other O%#$ countries during the .< !ears since ?orld ?ar II has clearl! been related to a near universal *average+ convergence in real wage levels in these countries, whereas the most obvious cases in which such a convergence did not take lace *&orth-4outh countries+ also ha ened to be cases in which trade was relativel! small and ImissingI. /here are man! theoretical reasons wh! factor rice e-uali(ation ma! not occur. If the relative countr! relative abundances are ver! different, then the theor! itself does not redict that the wage e-uali(ation will occur. /he same is true of factor intensit! reversals exist within relevant relative wage ranges. $!namic migration models such as Harris-/odaro are another class of theor! that ma! suggest that even if the static e-uilibrium solution does include the factor- rice e-uali(ation, the d!namic ath of the model ma! never reach this solution, so that when observed within an! finite time frame, it a lack of e-uali(ation would exist. 1<. F/he H.O. model remains useful as a wa! to redict the income distribution effects of trade.G $iscuss.

Answer' /he 4tol er-4amuelson theorem, one of the basic theorems arising from the Heckscher-Ohlin model !ields an elegant demonstration of the fact that changes in roduct rices *such as will occur when trade is ex anded or curtailed+ telescopes its effects onto factor rices, so that not onl! do relative factor returns mirror roduct rices, but that actual returns to factors ma! either rise or fall in real terms. Hence, as a olic! framework, the dis ro ortionate effect trade ma! have on real incomes of sectors, such as skilled-labor is -uite useful both theoreticall! and racticall! *or olemicall!+.

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Quantitative/Graphin !ro"le#s

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/wo countries exist in this model, ! and R$ ! is relativel! labor *%+ abundant, as is evident in the bottom right hori(ontal axis. If #ountr! ! were to be com letel! s eciali(ed in the labor-intensive roduct, C, it would be roducing at oint ,. In fact, it roduces both # and 1, at oint .. /he *autark!+ relative rice of C * in terms of &+ of #ountr! ! is at oint 'H and of #ountr! R at oint If trade were to o en u between these two countries, which would ex ort C and which would ex ort &> Is this consistent with the Heckscher-Ohlin model> %x lain.

Answer' #ountr! 2 would ex ort =. /his is consistent with the H-O model. /he countr! which is relativel! ca ital abundant ex orts the roduct which is relativel! ca ital intensive. 2. If trade were to o en u between 1 and 2, where would the world terms of trade locate in the figure above *somewhere on the !C/!& axis+> ?ould relative wages *(/r+ in the two countries become e-ual> Is this consistent with the HeckscherOhlin model> %x lain.

Answer' /he terms of trade would settle somewhere between the two autark! relative rices on the !C/!& axis. /he relative wages *(/r + will be lower than the highest and higher than the lowest on the vertical axis above, but will not coincide. /his last result is in contradiction to the factor rice e-uali(ation ex ectation we have from the model.

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&ow re eat the exercise but substitute countr! M for countr! R. How do the answers differ from those in -uestion 2 above> %x lain the reason for an! differences !ou note.

Answer' All the answers are the same exce t that one single relative wage will be established for both countries. /his ha ens because the two countries do not differ in relative factor availabilit! b! much, and hence a (one of overla exists which allows for this result. ,. In autark!, #ountr! ! was roducing at oint .. ?ith trade, would its roduction oint be found above or below oint .> %x lain wh!. ?hat must ha en in the )/% intensit! ratio in the roduction of each of the roducts in this countr! when moving from autark! to free trade>

Answer' /he oint of roduction with trade will be above oint .. /he countr! will be shifting its roduction com osition to be more heavil! weighted in labor intensive good, #. ?ithin each industr!, the roduction techni-ue will be more ca ital intensive, since with the rising relative wage, the o timal oint of roduction will involve sliding around the iso-uants in the direction of saving on the now relativel! more ex ensive labor. .. 3sing the answers to -uestion ,, can !ou guess which grou of roducers in #ountr! ! might lobb! against free trade>

Answer' In #ountr! 1, the owners of the relativel! scarce factor of roduction are the owners of ca ital. /heir relative and real incomes will decrease, and so the! ma! well attem t to lobb! for rotectionism, which ma! revent the countr! from moving to a free trade e-uilibrium.

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