11 The Heckscher-Ohlin Model

Question 1

Effect of change in factor supplies

Answer 1

The Rybczynski theorem: An increase in the endowment of an input leads to increased output in the sector that uses the input intensively and a fall in output in the other sector (holding output prices constant).

Intuition: If c₁ output ↑, then that sector needs more of both input factors. The other factor must come from the other sector → c_{<span>2</span>} must go down.

Question 2

Countries export the good that is ___________.

Answer 2

Countries export the good that is intensive in the factor in which it is abundant.

Question 3

A rise in the relative price of a good will lead to a rise in the real return to that factor which ______, and conversely, to a fall in _______.

Answer 3

A rise in the relative price of a good will lead to a rise in the real return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the real return to the other factor.

Question 4

Relative supply and equilibrium

Answer 4

Question 5

Gains from trade in the aggregate

Answer 5

Question 6

The Heckscher-Ohlin Model:

The distribution of income

Answer 6

In a perfectly competitive economy, profits are zero:

Apparel: 2w^U + w^S = P^A

Plastics: 3w^U + 3w^S = P^P

Question 7

Result of combining the Stolper-Samuelson theorem and the Heckscher-Ohlin theorem

Answer 7

Combined, the following must hold:
The abundant factor will gain from trade, the scarce factor will lose.

Question 8

Market clearings

Answer 8