5&6 - HECKSHER-OHLIN MODEL

Question 1

WHAT IS THE HECKSCHER-OHLIN MODEL ABOUT?

Answer 1

The Heckscher-Ohlin model explains trade based on differences in resources like land, labor, and capital. It shows that countries export goods that use their abundant resources intensively.

Question 2

WHAT ARE FACTORS OF PRODUCTION?

Answer 2

Factors of production are resources like land, labor, and capital that are used to produce goods.

Question 3

WHAT IS FACTOR-PROPORTIONS THEORY?

Answer 3

Trade is driven by the relative abundance of factors of production, with countries exporting goods that use their abundant factors intensively.

Question 4

WHAT ARE RELATIVE FACTOR ENDOWMENTS?

Answer 4

Relative factor endowment refers to the ratio of one factor of production to another. For example, Home’s relative labor endowment is L/K, while Foreign’s is L/K.

Question 5

WHAT IS FACTOR SUBSTITUTABILITY?

Answer 5

Factor substitutability means that goods can be produced using different combinations of factors. This is known as the “variable proportions” version of the Heckscher-Ohlin model.

Question 6

WHAT IS THE HECKSCHER-OHLIN THEOREM?

Answer 6

The country abundant in a factor will export goods that use that factor intensively. For example, a labor-abundant country like Home will export labor-intensive goods like cloth.

Question 7

WHAT IS THE PRODUCTION POSSIBILITY FRONTIER (PPF) IN THIS MODEL?

Answer 7

The PPF shows the trade-off between producing two goods given limited resources. It is concave due to diminishing returns to labor and capital.

Question 8

WHAT IS THE RYBCZYNSKI THEOREM?

Answer 8

The Rybczynski theorem states that an increase in the supply of one factor, holding goods prices fixed, will increase the output of the good that uses that factor intensively and decrease the output of the other good.

Question 9

WHAT IS THE STOLPER-SAMUELSON THEOREM?

Answer 9

The Stolper-Samuelson theorem states that trade increases the income of the abundant factor and decreases the income of the scarce factor. For example, at Home, trade increases wages but reduces capital returns.

Question 10

WHAT IS THE FACTOR-PRICE THEOREM?

Answer 10

The factor-price theorem states that trade causes factor returns to converge between countries, leading to equal prices for goods and factors in a free-trade equilibrium.

Question 11

HOW DO RELATIVE PRICES AFFECT FACTOR RETURNS?

Answer 11

When the relative price of a labor-intensive good like cloth increases, the wage-rental ratio also increases, leading to higher wages and lower returns to capital.

Question 12

WHAT IS THE RELATIVE SUPPLY CURVE?

Answer 12

The relative supply curve describes the quantities of two goods supplied based on their relative prices. Higher relative prices of cloth increase its supply and decrease food supply.

Question 13

WHAT ARE TERMS OF TRADE?

Answer 13

Terms of trade are defined as the world market price of a country’s exports divided by the world market price of its imports. Improvements in terms of trade increase welfare, while worsening terms decrease welfare.

Question 14

WHAT IS BIASED ECONOMIC GROWTH?

Answer 14

Biased growth occurs when the production of one good expands more than another. For example, export-biased growth increases the supply of exported goods, potentially worsening terms of trade.

Question 15

WHAT IS THE EFFECT OF EXPORT-BIASED GROWTH ON TERMS OF TRADE?

Answer 15

Export-biased growth worsens a country’s terms of trade by increasing the global supply of the exported good, reducing its price.

Question 16

WHAT IS THE EFFECT OF IMPORT-BIASED GROWTH ON TERMS OF TRADE?

Answer 16

Import-biased growth improves a country’s terms of trade by reducing pressure on imports, leading to a relative price increase for exports.

Question 17

WHAT IS INTERTEMPORAL TRADE?

Answer 17

Intertemporal trade is the exchange of current consumption for future consumption, where countries borrow or lend to balance current and future consumption.

Question 18

HOW DOES TECHNOLOGICAL CHANGE AFFECT INCOME INEQUALITY?

Answer 18

Skill-biased technological change (SBTC) increases demand for skilled workers, raising wages and contributing to wage inequality, especially in developed countries.

Question 19

WHAT IS FACTOR-PRICE EQUALIZATION?

Answer 19

Factor-price equalization is the theory that trade will lead to equal wages and capital returns across countries as factor movements adjust due to international trade.

Question 20

WHAT IS IMMISERIZING GROWTH?

Answer 20

Immiserizing growth is a theoretical situation where export-biased growth worsens terms of trade to such an extent that a country’s welfare decreases despite economic expansion. However, this effect is considered highly unlikely in practice.