Ch. 5: The Heckscher-Ohlin model

Question 1

What is comparative advantage based on in this model (HO)?

Answer 1

• The interaction between nations resources (Abundance of factors)
• The technology of production

Question 2

Is the HO model long run or short run?

Answer 2

We look at the long-run outcome, so all factors of production are mobile across sectors.

Question 3

Are opportunity costs constant?

Answer 3

No! The OC is higher when more units are being produced.

Question 4

In fig. 5.2, PP is a bowed downward scape. What does the scape tell us?

Answer 4

That the OC in terms of food of producing one more unit of cloth rises as the economy produces more cloth and less food.

Question 5

Where on the PPF does the economy produce?

Answer 5

It depends on the prices.

The economy produces at the point that maximizes the value of production.
It is point Q, which is the point on the PPF that touches the highest possible isovalue line. At that point, the slope of the PPF = -P_C/P_F –> OC of producing another unit of cloth = The relative price of cloth.

Question 6

What is the value of production?

Answer 6

The value of production (V)= P_C·Q_C+P_F·Q_F

Question 7

What is an isovalue line?

Answer 7

A line along which the value of output is constant

Question 8

What is the slope of an isovalue line?

Answer 8

-P_C/P_F

Question 9

What input choice will producers actually make?

Answer 9

• It depends on the relative costs of capital and labor.
o If capital rental rates are high and wages low, farmers will choose to produce using relatively little capital and a lot of labor.

Question 10

What does an upward sloping SS curve in fig. 5.6 tell us?

Answer 10

There is a one-to-one relationship between the ratio of the wage rate to the rental rate, (w/r), and the ratio of the price of cloth to that of food, P_C/P_F .

Question 11

What effects will an increase in the relative price of cloth have?

Answer 11

We can see that an increase in the price of cloth relative to that of food will raise the income of workers relative to that of capital owners  Such change in relative prices will raise the purchasing power of workers and lower the purchasing power of capital owners by raising real wages and lowering real rents in terms of BOTH goods

Question 12

What is a biased expansion of production possibilities?

Answer 12

When the PPF shifts out much more in one direction than in the other.

Question 13

Can a country be abundant in everything?

Answer 13

No

Question 14

What is a consequence of increase international trade in advanced economies?

Answer 14

Increased inequality in the income distribution.

Question 15

What does complete equalization of factor prices mean and when does it happen?

Answer 15

International trade leads to the relative prices of goods converge AND to complete equalization of factor prices. It means that wage rate and capital rent is the same in both countries.

Question 16

Is it realistic to have complete equalization of factor prices in the real world?

Answer 16

No, there are 3 assumptions that does not hold in real life:
• Technologies are the same
o It is not in real life. A country with a high-tech level might have both a higher wage rate and rental rate than a country with a low-tech level.

• Costless trade equalized the price of goods in the two countries
o Transport costs and barriers of trade ex. tariffs, import quotas and other restrictions prevent this.

• Both countries produce both goods
o If countries have different ratios of capital to labor or skilled to unskilled workers, this cannot be sufficient

Question 17

What does the Leontief paradox tell us?

Answer 17

The US have a high capital-labor ratio. Then they are expected to be an EX of capital-intensive goods, but they were not in the 25 years after WW2. They exported less capital-intensive goods than they imported: Leontief paradox

Question 18

As a country’s skill abundance increases, its exports are increasingly concentrated in sectors with higher skill intensity. How does this hold?

Answer 18

As predicted by the Chinese change in factor proportions, the concentration of exports in high-skill sectors steadily increases over time

Question 19

What are the implications of the HO model?

Answer 19

We do not observe factor-price equalization across countries. When we test the “pure” version of the Heckscher-Ohlin model that maintains all the assumptions behind factor-price equalization, it is not really being supported by empirical evidence.

A less restrictive version of the factor proportions model fits the predicted patterns for the factor content of trade