Resource and Trade

Question 1

describe Heckscher-Ohlin-Samuelson (HOS) model

Answer 1

2 x 2 x 2 factor model
- two countries, home and foreign
- each country produces two goods, computers (c) and shoes (s)
- production requires two factors of production, labour (l) and capital (k)

Question 2

assumptions of HOS model

Answer 2

1) both factors can move freely between industries

2) industries differ in relative factor intensity

3) countries differ in relative factor abundance

4) trade without restrictions

5) technologies used to produce 2 goods are identical across the economies

6) consumer tastes same across countries

Question 3

assumptions of HOS model - both factors can move freely between industries

Answer 3

capital must earn same rental rate (R) and labour earns same wage (W) in each industry

Question 4

assumptions of HOS model - technologies used to produce 2 goods are identical across the economies

Answer 4

exclude technological differences to focus on endowment differences as source of comparative advantage and trade

Question 5

assumptions of HOS model - consumer tastes same across the countries

Answer 5

by ignoring potential consumer differences, model focuses on endowment differences as determinant of trade

Question 6

define ‘autarky equilibrium’

Answer 6

relative price consumers willing to pay for a good equals the opportunity cost of producing them

Question 7

what is the Heckscher-Ohlin theorem?

Answer 7

with two goods and factors, each country will export good that uses intensively the factor of production it has in abundance and will import the other good

Question 8

what is the Stolper-Samuelson theorem?

Answer 8

in the long run, when all factors are mobile, increase in relative price of a good will increase real earnings of factor used intensively in production of that good and decrease real earnings of other factor

Question 9

define the ‘magnification effect’

Answer 9

relationship between changes in product and factor prices

Question 10

what is the Leontief paradox?

Answer 10

assumed in 1947 US was capital abundant relative to rest of world (ROW)
- from HO model he expected US would export capital intensive goods and import labour intensive goods
- found capital labour ratio for US imports was higher than for exports

Question 11

why does Leontief paradox exist?

Answer 11

• US and foreign technologies not same as assumed
• by focusing on labour and capital, land abundance in US was ignored
• no distinction between skilled and unskilled labour
• data for 1947 could be unusual due to WWII
• US engaged completely in free trade as is assumed by HO model

Question 12

how do we measure factor abundance?

Answer 12

to determine whether country is abundant in certain factor, compare country’s share of that factor with its share of world GDP
- if share of factor > share of world GDP country is abundant
- if share of factor < share of world GDP country is scarce

Question 13

factor content of trade used to measure…

Answer 13

factor intensity of exports and imports

Question 14

how to calculate factor content of trade

Answer 14

• multiply Leontief numbers by actual value of US exports/imports to give values for total exports/imports in terms of factors
• values are called factor content of exports/imports