Homework 3b
UCDavis, 160a, SSII 2011Prof. Farshid Mojaver
Heckshcer-Ohlin Model
Jeopardy Answers
DIRECTIONS: As in the popular TV game show, you are given an answer to a question and you must respond with the question. For example, if the answer is, "a tax on imports", then the correct question is, "What is a tariff?"
- term used to describe Argentina if Argentina has more land per unit of capital than Brazil.
- term used to describe aluminum production when aluminum production requires more energy per unit of capital than steel production.
- general term used to describe the amount of a factor needed to produce one unit of a good.
- the two key terms used in the Heckscher-Ohlin model; one to compare industries, the other to compare countries.
- term used to describe when the capital-labor ratio in an industry varies with changes in market wages and rents
- term describing the ratio of the unit-capital requirement and the unit-labor requirement in production of a good.
- the assumption in the Heckscher-Ohlin model about unemployment of capital and labor.
- interpretation given for the slope of the production possibility frontier.
- the H-O model theorem that would be applied to identify the effects of a tariff on the prices of goods and factors.
Multiple Choice Questions
1. In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in:
A. tastes. D. relative availabilities of factors of production.
B. military capabilities. E. labor productivities.
C. size.
2. In the 2-factor, 2 good Heckscher-Ohlin model, a change from autarky (no trade) to trade will benefit the owners of:
A. capital.
B. the relatively abundant factor of production.
C. the relatively scarce factor of production.
D. the relatively inelastic factor of production
E. the factor of production with the largest elasticity of substitution.
3. One way in which the Heckscher-Ohlin model differs from the Ricardo model of comparative advantage is by assuming that ______is (are) identical in all countries.
A. factor of production endowments D. technology
B. scale economies E. opportunity costs
C. factor of production intensities
4. According to the Hecksher-Ohlin model,
A. everyone automatically gains from trade
B. the scarce factor necessarily gains from trade
C. the gainers could compensate the losers and still retain gains.
D. a country gains if its exports have a high value added.
E. None of the above.
5. Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins:
A. wages and rents should rise in H.
B. wages and rents should fall in H.
C. wages should rise and rents should fall in H.
D. wages should fall and rents should rise in H.
E. None of the above.
6. 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 landowners should support US-European free trade.
B. European capitalists should support US-European free trade.
C. all capitalists in both countries should support free trade.
D. all landowners should support free trade.
E. None of the above.
7. Assume that only two countries, A and B, exist.
Consider the following data: Countries
Factor Endowments A B
Labor Force 45 20
Capital Stock15 10
If good S is capital intensive, then following the Heckscher-Ohlin Theory,
- country A will export good S.
- country B will export good S.
- both countries will export good S.
- trade will not occur between these two countries.
- Insufficient information is given.
False, True, Or Uncertain, Explain Why (Questions in Heckscher-Ohlin Theory)
Question 1
“Opening up free trade does hurt people in import-competing industries in the short run. But in the long run, when people and resources can move between industries, everybody ends up gaining from free trade.”
Question 2
“American workers gain from free trade with China because free trade lowers prices of clothing in the United States and American workers spent very large portion of their income on clothing”
More questions on H-O
1. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Considerthe production of hand-made rugs and assembly line robots in Canada and
India.
- Which country would you expect to be relatively labor-abundant, and which capital-abundant? Why?
- Which industry would you expect to be relatively labor-intensive, and which is capital-intensive? Why?
- Given your answers to (a) and (b), draw production possibilities frontiers for each country. Assuming that consumer preferences are the same in both countries, add indifference curves and relative price lines (without trade) to your PPF graphs. What do the slopes of the price lines tell you about the direction of trade?
- Allowing for trade between countries, redraw the graphs and include a “trade triangle”for each country. Identify and label the vertical and horizontal sides of thetriangles as either imports or exports.
2. Leontief ’s Paradox is an example of testing a trade model using actual data observations.If Leontief had observed that the amount of labor needed per $1 million of U.S.exports was 100 instead of 182,would he have reached the same conclusion? Explain.
3.According to the Heckscher-Ohlin model, two countries can equalize wage differencesby either engaging in international trade in goods or allowing skilled and unskilledlabor to freely move between the two countries. Comment.
4. According to the standard Heckscher-Ohlin model with two factors (capital and labor)and two goods, movement of Turkish migrants to Germany would decrease theamount of capital-intensive products produced in Germany. Discuss whether this istrue or false, and explain why.
5. Imagine a two good H-O economy which imports automobiles and exports wheat. Suppose the production of these two goods use only capital and labor. If the government raises a tariff on the import of automobiles it will raise the domestic price of autos. Suppose the price of wheat remains constant. Explain as a result of this tariff who in the economy will gain and who will lose in real terms?
6. Using a HO framework discuss the effects of U.S.-China trade on Skilled-Unskilled wage gap in US and China. Do we actually see these predicted effects on skilled-unskilled wage gaps in the two countries? Are you satisfied with this HO explanation of rising skilled-unskilled wage gap in US?
7. Laxland and Workland are two identical countries except that people in Workland work twice as hard of those in Laxland. Under all the usual HO assumptions what would be your prediction of the patterns of trade between these two countries? What do we know about wage rates before and after trade in these two countries?
Questions from Feenstra Ch4
1. This exercise uses the Heckscher-Ohlin model to predict the direction of trade.
Consider the production of hand-made rugs and assembly line robots in Canada and
India.
a.Which country would you expect to be relatively labor-abundant, and which capital-abundant? Why?
b.Which industry would you expect to be relatively labor-intensive, and which iscapital-intensive? Why?
c.Given your answers to (a) and (b), draw production possibilities frontiers for each country. Assuming that consumer preferences are the same in both countries, add indifference curves and relative price lines (without trade) to your PPF graphs.What do the slopes of the price lines tell you about the direction of trade?Canada’s no-trade production and consumption of robots and rugs correspondsto a relative price of robots that is lower than that in India. This is shown by theflatter sloped relative price line in Canada.
d.Allowing for trade between countries, redraw the graphs and include a “trade triangle”for each country. Identify and label the vertical and horizontal sides ofthe triangles as either imports or exports.
2. Suppose that there are drastic technological improvements in shoe production at
Home such that shoe factories can operate almost completely with computer-aided machines. Consider the following data for the Home country:
Computers: Sales revenue =PCQC= 100
Payments to labor = WLC= 50
Payments to capital = RKC= 50
Percentage increase in the price =∆PC/PC= 0%
Shoes: Sales revenue = PSQS= 100
Payments to labor WLS= 5
Payments to capital = RKS= 95
Percentage increase in the price =∆PS/PS= 50%
a.Which industry is capital-intensive? Is this a realistic scenario (i. e., are some industries capital-intensive in some countries and labor-intensive in others)?
b.Given the percentage changes in output prices above, calculate the percentagechange in the rental on capital.
c.How does the magnitude of this change compare with that of labor?
d.Which factor gains in real terms, and which factor loses? Are these results consistentwith the Stolper-Samuelson theorem?
3. In 2008, the Ukraine successfully negotiated terms to become a member of the World Trade Organization. Consequently, countries such as those in Western Europe areshifting toward free trade with the Ukraine. What does the Stolper-Samuelson theorem predict about the impact of the shift on the real wage of unskilled labor in Western
Europe? In the Ukraine?
9. The following are data on U. S. exports and imports in 2007 at the two-digit harmonizedschedule (HS) level. Which products do you think support the Heckscher-Ohlin theory? Which products are inconsistent?
Exports Imports HS Code Products ($ billions) ($ billions)22 Beverages 3.6 14.7
30 Pharmaceutical products 40.7 55.6
52 Cotton 4.9 0.8
61 Apparel 1.9 33.3
64 Footwear 1.0 17.6
72 Iron and steel 15.4 12.4
74 Copper 5.0 6.4
85 Electric machinery 124.9 212.1
87 Vehicles 73.6 131.9
88 Aircraft 83.0 18.4
94 Furniture 7.0 30.1
95 Toys 7.0 27.6
Source: International Trade Administration, U.S. Department of Commerce.
4.Data for soybean yield, production, and trade are provided below for 2007.
Yield Production Exports Imports(metric ton/hectare) (100,000 metric ton) (100,000 metric ton) (100,000 metric ton)
Australia 2.44 3.2 0.3 1.0
Brazil 2.81 5785.7 2373.4 9.8
Canada 2.30 269.6 186.8 21.3
China 1.45 1272.5 45.7 3315.0
France 2.60 8.5 1.7 49.4
Ireland 3.13 40.8 2.08.4
Japan 1.64 22.7 0.1 416.1
Mexico 1.41 8.8 0.0 361.1
Russian Federation 0.9265.0 1.7 12.5
United States 2.81 7286.0 2984.0 27.6
Source: Food and Agriculture Organization
Suppose that the countries listed above are engaged in free trade and that soybean production is land intensive. Then answer:
- In which countries does land benefit from free trade in soybeans? Explain.
- In which countries does land lose from free trade in soybeans? Explain.
- In which countries does the move to free trade in soybeans have little or no effect on the land rental? Explain.
5. According to the Heckscher-Ohlin model, two countries can equalize wage differencesby either engaging in international trade in goods or allowing skilled and unskilledlabor to freely move between the two countries. Comment.