HO Model Flashcards
Assumption 3
The foreign country is labor abundant, and the Home country is capital abundant
Assumption 4
Goods can be traded freely, but labor and capital don’t move between countries. This allows for migration and FDI
Assumption 5
Technologies used to produce the 2 goods are identical across the countries
Assumption 6
Consumer tastes are the same across countries, and preferences for computers and shoes don’t vary with a country’s level of income
What does point A on the chart signify?
The autarky equilibrium, or the maximum utility each country can receive without trade
Determinants of Supply
- Excise taxes
-Number of competitors
-Expectations
-Subsidies
-Advances in technology
Results of expansion in supply
Curve moves right; quantity increases and prices decrease.
Results of contractions in supply
Curve moves left; quantity (on the x axis) decreases and the prices increase.
Determinants of demand
-Changes in consumer income
-consumer expectations
-changes in demographics
-changing tastes and advertising
Results of expansions in demand
Curve moves to the right. Prices increase, and so does the quantity
Results of contraction in demand
Curve moves left; prices and quantity both decrease
Assumption 1
Two factors of production, L and K, can move freely between the two industries
Assumption 2
Two sectors: Shoes and computers. Production of shoes is labor intensive
Labor intensity
Production requires more labor per unit of capital to produce shoes than computers
Labor abundant
Labor capital ratio in the foreign country exceeds that in the Home country
