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International Economics, 10e (Krugman/Obstfeld/Melitz)
Chapter 5 Resources and Trade: The Heckscher-Ohlin Model
5.1 Model of a Two-Factor Economy
1) In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would
Answer: D
Page Ref: 93-94
Difficulty: Moderate
2) In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in
Answer: D
Page Ref: 84
Difficulty: Easy
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.
Answer: D
Page Ref: 94
Difficulty: Easy
4) If a country produces good Y (measured on the vertical axis) and good X (measured on the horizontal axis), then the absolute value of the slope of its production possibility frontier is equal to
Answer: A
Page Ref: 87
Difficulty: Easy
5) The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that the former
Answer: C
Page Ref: 84
Difficulty: Easy
6) “A good cannot be both land- and labor-intensive.” Discuss.
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 per acre (or acres per worker); or wage per rental unit (or rental per wage). In order to illustrate the logic of the statement above, let us assume that the production of a broom requires 4 workers and 1 acre. Also, let us assume that the production of one bushel of wheat requires 40 workers and 80 acres. In this case the acres per person required to produce a broom is one quarter, whereas to produce a bushel of wheat requires 2 acres per person. The wheat is therefore (relatively) land intensive, and the broom is (relatively) labor intensive.
Page Ref: 89-90
Difficulty: Moderate
7) “No country is abundant in everything.” Discuss.
Answer: The concept of factor abundance is (like factor intensities) a relative concept. When we identify a country as being capital abundant, we mean that it has more capital per worker than does the other country. If one country has more capital worker than another, it is an arithmetic impossibility that it also has more workers per unit of capital.
Page Ref: 92-94
Difficulty: Moderate
8) In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of ________ will have a production possibility frontier that is biased toward production of the ________ good.
Answer: A
Page Ref: 92-94
Difficulty: Easy
9) In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of ________ will have a production possibility frontier that is biased toward production of the ________ good.
Answer: A
Page Ref: 92-94
Difficulty: Easy
10) In the 2-factor, 2 good Heckscher-Ohlin model, the production possibility frontier is kinked when
Answer: A
Page Ref: 86-87
Difficulty: Moderate
11) The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike in the Ricardian model, it is likely that
Answer: A
Page Ref: 87
Difficulty: Moderate
12) In the Heckscher-Ohlin model, countries are assumed to differ only in terms of their
Answer: A
Page Ref: 90
Difficulty: Easy
5.2 Effects of International Trade Between Two-Factor Economies
1) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a country’s ________ factor and will ________ the good that uses that factor intensively.
Answer: A
Page Ref: 91
Difficulty: Easy
2) According to the Heckscher-Ohlin model, the source of comparative advantage is a country’s
Answer: A
Page Ref: 94-95
Difficulty: Easy
3) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a country’s ________ factor and will ________ the good that uses that factor intensively.
Answer: A
Page Ref: 96
Difficulty: Easy
4) According to the Heckscher-Ohlin model
Answer: A
Page Ref: 96
Difficulty: Easy
5) In the Heckscher-Ohlin model, when two countries begin to trade with each other
Answer: A
Page Ref: 95
Difficulty: Easy
Assume that only two countries, A and B, exist.
6) Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory
Answer: A
Page Ref: 94-95
Difficulty: Moderate
7) Refer to the table above. If you are told that Country B is very much richer than Country A, then the correct answer is
Answer: A
Page Ref: 94-95
Difficulty: Moderate
8) Refer to the table above. You are told that Country B is very much larger than country A. The correct answer is
Answer: A
Page Ref: 94-95
Difficulty: Moderate
9) Refer to the table above. You are told that Country B has no minimum wage or child labor laws. Now the correct answer is
Answer: A
Page Ref: 94-95
Difficulty: Moderate
10) If a good is labor intensive it means that the good is produced
Answer: A
Page Ref: 94-95
Difficulty: Easy
11) In the Heckscher-Ohlin model, when there is international-trade equilibrium
Answer: A
Page Ref: 96
Difficulty: Moderate
12) If a good is capital intensive it means that the good is produced
Answer: A
Page Ref: 90
Difficulty: Easy
13) The Heckscher-Ohlin model predicts all of the following EXCEPT
Answer: A
Page Ref: 89-97
Difficulty: Moderate
14) If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade began between these two countries
Answer: A
Page Ref: 95-96
Difficulty: Moderate
15) If Australia has more land per worker, and Belgium has more capital per worker,then if trade began between these two countries
Answer: A
Page Ref: 95-96
Difficulty: Moderate
16) If Japan is relatively capital rich and the United States is relatively land rich, and if food is relatively land intensive then trade between these two, formerly autarkic countries will result in
Answer: A
Page Ref: 95-96
Difficulty: Moderate
17) Trade benefits a country by
Answer: A
Page Ref: 95-96
Difficulty: Easy
18) If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, we predict that Gambinia will export
Answer: A
Page Ref: 95-96
Difficulty: Moderate
19) If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, in order to improve the country’s economic welfare, the Gambinian government should
Answer: A
Page Ref: 95-96
Difficulty: Easy
20) International trade leads to complete equalization of factor prices. Discuss.
Answer: This statement is typically “true . . . but.” Under a strict and limited set of assumptions, such as the original Heckscher-Ohlin model which excludes country specific technologies; non-homothetic tastes; factor intensity reversals; large country differences in (relative) factor abundances, more factors than goods, and an equilibrium solution within the “cone of specialization”; then it may be demonstrated that internal consistency demands that the above stated sentence is “true.” However, the minute one relaxes any of the above listed assumptions one may easily identify solutions, which contradict the factor price equalization theorem.
Page Ref: 95-96
Difficulty: Moderate
21) Why is the H.O. model called the factor-proportions theory?
Answer: The H.O. model explores the nature and the limitations of assuming that the sole determinant of comparative advantage is inter-country differences in (relative) factor proportions.
Page Ref: 95-96
Difficulty: Easy
22) Refer to above figure. Two countries exist in this model, P and R. P is relatively labor (L) abundant, as is evident in the bottom right horizontal axis. If Country P were to be completely specialized in the labor-intensive product, C, it would be producing at point 4. In fact, it produces both C and P, at point 5. The (autarky) relative price of C (in terms of F) of Country P is at point 3; and of Country R at point 1. If trade were to open up between these two countries, which would export C and which would export F? Is this consistent with the Heckscher-Ohlin model? Explain.
Answer: Country R would export F. This is consistent with the H-O model. The country which is relatively capital abundant exports the product which is relatively capital intensive.
Page Ref: 95-96
Difficulty: Moderate
23) Refer to above figure. If trade were to open up between P and R, where would the world terms of trade locate in the figure above (somewhere on the PC/PF axis)? Would relative wages (w/r) in the two countries become equal? Is this consistent with the Heckscher-Ohlin model? Explain.
Answer: The terms of trade would settle somewhere between the two autarky relative prices on the PC/PF axis. The relative wages (w/r) will be lower than the highest and higher than the lowest on the vertical axis above, but will not coincide. This last result is in contradiction to the factor price equalization expectation we have from the model.
Page Ref: 95-96
Difficulty: Moderate
24) Refer to above figure. Would you expect to find that the real wages become equalized in both countries? Explain the reason for any differences you note.
Answer: We would expect that one single relative wage will be established for both countries. This happens because the two countries do not differ in relative factor availability by much, and hence a zone of overlap exists which allows for this result.
Page Ref: 102-103
Difficulty: Moderate
25) Refer to above figure. In autarky, Country P was producing at point 5. With trade, would its production point be found above or below point 5? Explain why. What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?
Answer: The point of production with trade will be above point 5. The country will be shifting its production composition to be more heavily weighted in labor intensive good, C. Within each industry, the production technique will be more capital intensive, since with the rising relative wage, the optimal point of production will involve sliding around the isoquants in the direction of saving on the now relatively more expensive labor.
Page Ref: 102-103
Difficulty: Moderate
26) One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that tastes are homothetic, or that if the per capita incomes were the same in two countries, the proportions of their expenditures allocated to each product would be the same as it is in the other country. Imagine that this assumption is false, and that in fact, the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage. How would this affect the relationship between relative factor abundance between the two countries, and the nature (factor-intensity) of the product each exports? What if the taste bias favored the imported good?
Answer: If in fact national tastes were strongly biased in favor of the product in which the country enjoyed a comparative advantage, then we would expect a bias in favor of rejecting the Heckscher-Ohlin Theorem in actual trade data. The engine driving the H-O model is that a country should be expected to have a relatively low cost of producing the good in which it has a comparative advantage. However, the respective demand forces would tend to raise the price of this good, so that the expected pattern would not generally be observed. However, if the tastes were biased in favor of the imported good, then the predictions of the Heckscher-Ohlin Theorem would be expected to be generally observed.
Page Ref: 102-103
Difficulty: Difficult
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.
27) Use the diagram above to identify the pre-trade situation for Australia and Sri-Lanka. Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage, w/r? Which product is the labor intensive, and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries. Show where the relative wages of each will appear.
Answer: You will find Sri-Lanka to the left of Australia on the K/L axis.
Australia has a higher relative wage.
Food is the land intensive product.
The relative price PC/PF is found between the two autarkic prices.
The post trade relative wage is between the two autarkic ones on the vertical axis.
Page Ref: 95-96
Difficulty: Difficult
28) 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?
Answer: The proportion of food to cloth will increase in the production of Australia Sri Lanka will export cloth. The relative (and real) incomes of workers will fall in Australia as a result of trade. Land Owners in Australia should lobby in favor of trade. They would also lobby for free labor mobility (of workers into Australia), since the marginal product of labor is high, the owners of land have much (Ricardian) rents to gain from an inflow of workers.
Page Ref: 95-96
Difficulty: Difficult
29) 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?
Answer: Australia would still export food. As a result of trade, wages will fall in Australia and will rise in Sri-Lanka. However, in this case, the wages in Australia will remain higher than in Sri-Lanka, creating an incentive for migration from the latter to the former country.
Page Ref: 95-96
Difficulty: Difficult
30) Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins
Answer: A
Page Ref: 95-96
Difficulty: Moderate
31) 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
Answer: A
Page Ref: 95-96
Difficulty: Easy
32) International trade has strong effects on income distributions. Therefore, international trade
Answer: A
Page Ref: 95-96
Difficulty: Easy
33) Factors tend to be specific to certain uses and products
Answer: A
Page Ref: 96
Difficulty: Easy
34) If the price of the capital intensive product rises more than does the price of the land intensive product, then
Answer: A
Page Ref: 96
Difficulty: Easy
35) If trade opens up between the two formerly autarkic countries, Australia and Belgium, then
Answer: A
Page Ref: 96
Difficulty: Easy
5.3 Empirical Evidence on the Heckscher-Ohlin Model
1) The Leontief Paradox
Answer: A
Page Ref: 104
Difficulty: Easy
2) The Leontief Paradox
Answer: A
Page Ref: 104
Difficulty: Easy
3) The 1987 study by Bowen, Leamer and Sveikauskas
Answer: A
Page Ref: 105
Difficulty: Easy
4) Empirical observations on actual North-South trade patterns tend to
Answer: A
Page Ref: 110
Difficulty: Moderate
5) The Case of the Missing Trade refers to
Answer: A
Page Ref: 105
Difficulty: Moderate
6) Countries do not in fact export the goods the H.O. theory predicts. Discuss.
Answer: This statement is not true. Although one may find many cases where it seems to be true (e.g., the Leontief Paradox), all one needs to do in order to render the above statement not (generally) true is to find one counter example. In fact, one can find large subsets of agricultural and commodity products in which the H.O predictions are generally fulfilled. Labor-intensive countries such as Bangladesh do in fact export relatively labor-intensive goods. Capital-intensive countries such as Germany do in fact export capital-intensive products (at least to South countries). Countries such as Costa Rica (“sunshine abundant”) tend to export bananas (sunshine-intensive products). The U.S. (a wheat-land-abundant country) does indeed export wheat (a wheat-land intensive product). In fact, since the early 1980s, the Leontief Paradox was not found to describe the U.S. trade data (hence ratifying the H.O. theory).
Page Ref: 109-110
Difficulty: Moderate
7) Why do we observe the Leontief paradox?
Answer: There are many possible answers. They may be classified into three groups. One would argue that the model, or theory is wrong. The second would argue that the theory is correct (internally consistent and descriptive of real world data), but the real world data is incorrectly perceived, defined or measured. The third would argue that the statement itself is wrong, and that in fact the Leontief paradox itself is not actually observed, but rather is due to faulty logical rendering of the original model. Empirical studies conducted since Leontief’s work was published suggest that, by relaxing the model’s restrictive assumptions regarding technology, goods, and trade costs, evidence in support of the HO model was strengthened and evidence of the Leontief effect was diminished.
Page Ref: 105-107
Difficulty: Moderate
8) Why are prices of factors of production NOT equalized?
Answer: Again this statement may or may not be argued to be true. On the one hand, the large volume and growth in world trade between the United States and other OECD countries during the 50 years since World War II has clearly 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 place (North-South countries) also happened to be cases in which trade was relatively small and “missing.”
There are many theoretical reasons why factor price equalization may not occur. If the relative country relative abundances are very different, then the theory itself does not predict that the wage equalization will occur. The same is true of factor intensity reversals exist within relevant relative wage ranges. Dynamic migration models such as Harris-Todaro are another class of theory that may suggest that even if the static equilibrium solution does include the factor-price equalization, the dynamic path of the model may never reach this solution, so that when observed within any finite time frame, it a lack of equalization would exist..
Page Ref: 109-110
Difficulty: Difficult
9) 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? How did the results obtained by Davis and Weinstein strengthen support for the validity of the HO model?
Answer: Trefler demonstrated that the actual volume of world trade is significantly less than that which would be predicted by the Heckscher-Ohlin model. One explanation is that North-South trade is especially less than would be predicted by a factor proportions model. If technologies differ in the poorer countries, then it is possible that the cost of producing a product, which uses relatively much of their abundant factor may still be higher than the cost of producing it in the other country. Davis and Weinstein showed that, relaxing the restrictive assumptions regarding technology, goods, and trade costs, yielded empirical results that support the model.
Page Ref: 106-107
Difficulty: Difficult
10) 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?
Answer: The answer here is straightforward (though it has various interesting implications). In this case we cannot define or identify a product in terms of its relative factor intensity (at all or any relative wage level). Therefore, the Heckscher-Ohlin Theorem is ipso-facto inapplicable.
Page Ref: 103-110
Difficulty: Difficult
11) 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?
Answer: There is a clear difference in relative factor availabilities between North and South countries, no matter how we define and measure the factors of production. Hence, the factor-proportions theory of trade may be sensibly expected to explain the pattern (though not the volume) of trade between these two groups of countries. However, the North North trade partners do not vary significantly in their relative factor availabilities, so that other forces, such as scale economies play a relatively large role in determining trade patterns.
Page Ref: 94-102
Difficulty: Difficult
12) 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?
Answer: The pattern of trade is generally observed to conform to the Heckscher-Ohlin models expectations. That is, the developing countries tend to export labor-intensive goods, such as textiles, and import capital-intensive goods such as machinery. The volume however is quite lower than what would be expected from the Neoclassical model. There are many possible reasons, such as financial crises necessitating premia in the financing of this trade.
Page Ref: 94-102
Difficulty: Moderate
13) If two countries are very different in relative factor abundance, then empirical support for which of the following would less likely?
Answer: A
Page Ref: 102
Difficulty: Easy
14) Which of the following empirical studies cast the most doubt on the Heckscher-Ohlin model?
Answer: A
Page Ref: 106-107
Difficulty: Easy
15) Which of the following empirical studies provided the most support for the heckscher-Ohlin model?
Answer: E
Page Ref: 106-107
Difficulty: Easy
16) Empirical support for the Heckscher-Ohlin model was weakest when the study applied
Answer: C
Page Ref: 106-107
Difficulty: Easy
5.4 Appendix to Chapter 5: Factor Prices, Goods Prices, and Production Decisions
1) Which of the following is an assertion of the Heckscher-Ohlin model?
Answer: A
Page Ref: 114-117
Difficulty: Moderate
2) Which of the following is an assertion of the Heckscher-Ohlin model?
Answer: A
Page Ref: 114-117
Difficulty: Moderate
3) Which of the following is an assertion of the Heckscher-Ohlin model?
Answer: A
Page Ref: 114-117
Difficulty: Moderate
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
