The Heckscher-Ohlin model

Question 1

In the 2-factor, 2-good Heckscher-Ohlin model, an influx of workers from across the border would
A) move the point of production along the production possibility curve.
B) shift the production possibility curve outward, and increase the production of both goods.
C) shift the production possibility curve outward and decrease the production of the labor- intensive product.
D) shift the production possibility curve outward and decrease the production of the capital- intensive product.
E) shift the possibility curve outward and displace preexisting labor.

Answer 1

D) shift the production possibility curve outward and decrease the production of the capital- intensive product.

Question 2

In the 2-factor, 2-good Heckscher-Ohlin model, the two countries differ in
A) tastes and preferences.
B) military capabilities.
C) the size of their economies.
D) relative abundance of factors of production.
E) labor productivities.

Answer 2

D) relative abundance of factors of production.

Question 3

If a country produces good Y (measured on the vertical axis) and good X (measured on the horizontal axis), then the absolute value of the slope of its production possibility frontier is equal to
A) the opportunity cost of good X.
B) the price of good X divided by the price of good Y.
C) the price of good Y divided by the price of good X.
D) the opportunity cost of good Y.
E) the cost of capital (assuming that good Y is capital intensive) divided by the cost of labor.

Answer 3

A) the opportunity cost of good X.

Question 4

he Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that the former
A) has only two countries.
B) has only two products.
C) has two factors of production.
D) has two production possibility frontiers (one for each country).
E) has varying wage rates.

Answer 4

C) has two factors of production.

Question 5

“A good cannot be both land- and labor-intensive.” Discuss.

Answer 5

In a two-good, two-factor model, such as the original Heckscher-Ohlin framework, the factor intensities are relative intensities. Hence, the relevant statistic is either workers per acre (or acres per worker); or wage per rental unit (or rental per wage). In order to illustrate the logic of the statement above, let us assume that the production of a broom requires 4 workers and 1 acre. Also, let us assume that the production of one bushel of wheat requires 40 workers and 80 acres. In this case the acres per person required to produce a broom is one quarter, whereas to produce a bushel of wheat requires 2 acres per person. The wheat is therefore (relatively) land intensive, and the broom is (relatively) labor intensive.

Question 6

No country is abundant in everything.” Discuss.

Answer 6

The concept of factor abundance is (like factor intensities) a relative concept. When we identify a country as being capital abundant, we mean that it has more capital per worker than does the other country. If one country has more capital worker than another, it is an arithmetic impossibility that it also has more workers per unit of capital.

Question 7

In the 2-factor, 2-good Heckscher-Ohlin model, the country with a relative abundance of \_\_\_\_\_\_\_\_ will have a production possibility frontier that is biased toward production of the \_\_\_\_\_\_\_\_ good.
A) labor; labor intensive
B) labor; capital intensive 
C) land; labor intensive 
D) land; capital intensive 
E) capital; land intensive

Answer 7

A) labor; labor intensive

Question 8

In the 2-factor, 2-good Heckscher-Ohlin model, the country with a relative abundance of \_\_\_\_\_\_\_\_ will have a production possibility frontier that is biased toward production of the \_\_\_\_\_\_\_\_ good.
A) capital; capital intensive
B) labor; capital intensive 
C) land; labor intensive 
D) land; capital intensive 
E) labor; land intensive

Answer 8

A) capital; capital intensive

Question 9

In the 2-factor, 2-good Heckscher-Ohlin model, the production possibility frontier is kinked when
A) there is no factor substitution in production.
B) the opportunity cost of production is constant.
C) there are unemployed factor resources.
D) a country does not engage in trade.
E) transportation costs are very high.

Answer 9

A) there is no factor substitution in production.

Question 10

The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike in the Ricardian model, it is likely that
A) countries will not be fully specialized in one product.
B) countries will benefit from free international trade.
C) countries will consume outside their production possibility frontier.
D) comparative advantage will not determine the direction of trade.
E) global production will decrease under trade.

Answer 10

A) countries will not be fully specialized in one product.

Question 11

In the Heckscher-Ohlin model, countries are assumed to differ only in terms of their 
A) factor endowments.
B) tastes and preferences.
C) available technologies.
D) factor productivities. 
E) physical size.

Answer 11

A) factor endowments

Question 12

One way in which the Heckscher-Ohlin model differs from the Ricardo model of comparative advantage is by assuming that \_\_\_\_\_\_\_\_ is (are) identical in all countries.
A) factor endowments
B) scale of production
C) factor intensities 
D) technology
E) opportunity costs

Answer 12

D) technology

Question 13

In the 2-factor, 2-good Heckscher-Ohlin model, trade will \_\_\_\_\_\_\_\_ the owners of a country's \_\_\_\_\_\_\_\_ factor and will \_\_\_\_\_\_\_\_ the good that uses that factor intensively.
A) benefit; abundant; export
B) harm; abundant; import
C) benefit; scarce; export 
D) benefit; scarce; import 
E) harm; scarce; export

Answer 13

A) benefit; abundant; export

Question 14

According to the Heckscher-Ohlin model, the source of comparative advantage is a country's A) factor endowments.
B) technology.
C) advertising.
D) human capital.
E) political system.

Answer 14

A) factor endowments.

Question 15

In the 2-factor, 2-good Heckscher-Ohlin model, trade will \_\_\_\_\_\_\_\_ the owners of a country's \_\_\_\_\_\_\_\_ factor and will \_\_\_\_\_\_\_\_ the good that uses that factor intensively.
A) harm; scarce; import
B) harm; abundant; import
C) benefit; scarce; export 
D) benefit; scarce; import 
E) harm; scarce; export

Answer 15

A) harm; scarce; import

Question 16

According to the Heckscher-Ohlin model
A) the gainers from trade could compensate the losers and still retain gains.
B) everyone gains from trade.
C) the scarce factor gains from trade and the abundant factor loses.
D) a country gains from trade if its exports have a high value added.
E) only the country with the more advanced technology gains from trade.

Answer 16

A) the gainers from trade could compensate the losers and still retain gains.

Question 17

In the Heckscher-Ohlin model, when two countries begin to trade with each other
A) the relative prices of traded goods in the two countries converge.
B) relative factor prices in the two countries diverge.
C) benefits from trade are evenly distributed between the two countries.
D) all factors in both countries will gain from trade.
E) all factors in one country will gain, but there may be no gains in the other country.

Answer 17

A) the relative prices of traded goods in the two countries converge.

Question 18

Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.

Answer 18

A) country B will export good S.

Question 19

Refer to the table above. If you are told that Country B is very much richer than Country A, then the correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.

Answer 19

country B will export good S.

Question 20

Refer to the table above. You are told that Country B is very much larger than country A. The correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.

Answer 20

country B will export good S.

Question 21

Refer to the table above. You are told that Country B has no minimum wage or child labor laws. Now the correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.

Answer 21

country B will export good S.

Question 22

If a good is labor intensive it means that the good is produced
A) using relatively more labor than goods that are not labor intensive.
B) using labor as the only input.
C) using more labor per unit of output than goods that are not labor intensive.
D) using labor such that the total cost of labor is greater than the total cost of capital.
E) using labor such that the cost of labor is more than 50% of total cost.

Answer 22

using relatively more labor than goods that are not labor intensive.

Question 23

In the Heckscher-Ohlin model, when there is international-trade equilibrium
A) the capital-rich country will charge more for the capital-intensive good than the price paid by the capital-poor country for the capital-intensive good.
B) workers in the capital-rich country will earn more than those in the poor country.
C) the workers in the capital-rich country will earn less than those in the poor country.
D) the relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country.
E) the capital-rich country will charge less for the capital-intensive good than the price paid by the capital-poor country for the capital-intensive good.

Answer 23

the relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country.

Question 24

If a good is capital intensive it means that the good is produced
A) using capital as the only input.
B) using capital such that the cost of capital is more than 50% of total cost.
C) using capital such that the total cost of capital is greater than the total cost of labor. D) using relatively more capital than goods that are not labor intensive.
E) using more capital per unit of output than goods that are not capital intensive.

Answer 24

using relatively more capital than goods that are not labor intensive.

Question 25

The Heckscher-Ohlin model predicts all of the following EXCEPT
A) that relative wages will tend to become equal in both trading countries.
B) which factor of production within each country will gain from trade.
C) which country will export which product.
D) that trade increases a country’s overall welfare.
E) the volume of trade.

Answer 25

the volume of trade

Question 26

If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade began between these two countries
A) the relative price of the capital-intensive product would decrease in Belgium.
B) relative product prices would diverge between Australia and Belgium.
C) the relative price of the land-intensive product would increase in Australia.
D) the relative price of the land-intensive product would increase in Belgium.
E) the relative price of the capital-intensive product would increase in Australia.

Answer 26

C) the relative price of the land-intensive product would increase in Australia.

Question 27

If Australia has more land per worker, and Belgium has more capital per worker,then if trade began between these two countries
A) the real income of labor in Australia would decline.
B) the real income of labor in Belgium would decline.
C) the real income of landowners in Belgium would decline.
D) the real income of capital owners in Australia would increase.
E) the real income of labor in both countries would decline.

Answer 27

C) the real income of landowners in Belgium would decline.

Question 28

If Japan is relatively capital rich and the United States is relatively land rich, and if food is relatively land intensive then trade between these two, formerly autarkic countries will result in
A) a global increase in the relative price of food.
B) an increase in the relative price of food in the U.S.
C) a decrease in the relative price of food in both countries.
D) an increase in the relative price of food in Japan.
E) an increase in the relative price of food in both countries.

Answer 28

B) an increase in the relative price of food in the U.S.

Question 29

Trade benefits a country by
A) increasing available consumption choices.
B) reducing the relative price of the exported good.
C) increasing the wage rate.
D) increasing the real income of all resource owners.
E) reducing the need for specialization in production.

Answer 29

A) increasing available consumption choices.

Question 30

If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, we predict that Gambinia will export
A) capital-intensive goods.
B) labor-intensive goods.
C) both labor- and land-intensive goods.
D) both capital- and land-intensive goods.
E) land-intensive goods.

Answer 30

B) labor-intensive goods.

Question 31

If Gambinia has many workers but very little land and even less productive capital, then, following the Heckscher-Ohlin model, in order to improve the country’s economic welfare, the Gambinian government should
A) discontinue all international trade.
B) protect the labor-intensive product.
C) engage in free trade.
D) protect the capital-intensive product.
E) protect the land-intensive product.

Answer 31

C) engage in free trade.

Question 32

International trade leads to complete equalization of factor prices. Discuss.

Answer 32

This statement is typically “true . . . but.” Under a strict and limited set of assumptions, such as the original Heckscher-Ohlin model which excludes country specific technologies; non- homothetic tastes; factor intensity reversals; large country differences in (relative) factor abundances, more factors than goods, and an equilibrium solution within the “cone of specialization”; then it may be demonstrated that internal consistency demands that the above stated sentence is “true.” However, the minute one relaxes any of the above listed assumptions one may easily identify solutions, which contradict the factor price equalization theorem.

Question 33

Why is the H.O. model called the factor-proportions theory?

Answer 33

The H.O. model explores the nature and the limitations of assuming that the sole determinant of comparative advantage is inter-country differences in (relative) factor proportions.

Question 34

(f1). Two countries exist in this model, P and R. P is relatively labor (L) abundant, as is evident in the bottom right horizontal axis. If Country P were to be completely specialized in the labor-intensive product, C, it would be producing at point 4. In fact, it produces both C and P, at point 5. The (autarky) relative price of C (in terms of F) of Country P is at point 3; and of Country R at point 1. If trade were to open up between these two countries, which would export C and which would export F? Is this consistent with the Heckscher-Ohlin model? Explain.

Answer 34

Country R would export F. This is consistent with the H-O model. The country which is relatively capital abundant exports the product which is relatively capital intensive.

Question 35

(f1) If trade were to open up between P and R, where would the terms of trade locate in the figure above (somewhere on the PC/PF axis)? Would relative wages (w/r) in the two countries become equal? Is this consistent with the Heckscher-Ohlin model? Explain.

Answer 35

The terms of trade would settle somewhere between the two autarky relative prices on the PC/PF axis. The relative wages (w/r) will be lower than the highest and higher than the lowest on the vertical axis above, but will not coincide. This last result is in contradiction to the factor price equalization expectation we have from the model.

Question 36

(f1) Would you expect to find that the real wages become equalized in both countries? Explain the reason for any differences you note.

Answer 36

We would expect that one single relative wage will be established for both countries. This happens because the two countries do not differ in relative factor availability by much, and hence a zone of overlap exists which allows for this result.

Question 37

(f1) In autarky, Country P was producing at point 5. With trade, would its production point be found above or below point 5? Explain why. What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?

Answer 37

The point of production with trade will be above point 5. The country will be shifting its production composition to be more heavily weighted in labor intensive good, C. Within each industry, the production technique will be more capital intensive, since with the rising relative wage, the optimal point of production will involve sliding around the isoquants in the direction of saving on the now relatively more expensive labor.

Question 38

One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that tastes are homothetic, or that if the per capita incomes were the same in two countries, the proportions of their expenditures allocated to each product would be the same as it is in the other country. Imagine that this assumption is false, and that in fact, the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage. How would this affect the relationship between relative factor abundance between the two countries, and the nature (factor- intensity) of the product each exports? What if the taste bias favored the imported good?

Answer 38

If in fact national tastes were strongly biased in favor of the product in which the country enjoyed a comparative advantage, then we would expect a bias in favor of rejecting the Heckscher-Ohlin Theorem in actual trade data. The engine driving the H-O model is that a country should be expected to have a relatively low cost of producing the good in which it has a comparative advantage. However, the respective demand forces would tend to raise the price of this good, so that the expected pattern would not generally be observed. However, if the tastes were biased in favor of the imported good, then the predictions of the Heckscher-Ohlin Theorem would be expected to be generally observed.

Question 39

(f2) Use the diagram above to identify the pre-trade situation for Australia and Sri Lanka. Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage, w/r? Which product is the labor intensive, and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries. Show where the relative wages of each will appear.

Answer 39

You will find Sri Lanka to the left of Australia on the K/L axis. Australia has a higher relative wage.
Food is the land intensive product.
The relative price PC/PF is found between the two autarkic prices.
The post-trade relative wage is between the two autarkic ones on the vertical axis.

Question 40

(f2) demonstrate what happens to the composition of production (that is quantity of cloth per 1 unit of food) in Australia once trade is established between the two countries. Which country will export cloth? What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease? Would land owners in Australia lobby for or against free trade? Would land owners in Australia lobby for or against free admittance of immigrant workers?

Answer 40

The proportion of food to cloth will increase in the production of Australia. Sri Lanka will export cloth. The relative (and real) incomes of workers will fall in Australia as a result of trade. Land owners in Australia should lobby in favor of trade. They would also lobby for free labor mobility (of workers into Australia), since the marginal product of labor is high, the owners of land have much (Ricardian) rents to gain from an inflow of workers.

Question 41

(f2) Imagine that the relative capital abundance of Australia was so much greater than that of Sri Lanka, that we would have to locate Australia far to the right on the K/L axis. If this were so far to the right that there was no area of overlap on the w/r axis, then what product would Australia export? Which product will each of the trade partners export? Will the relative wages as calculated now be the same or different in both Australia and Sri Lanka?

Answer 41

Australia would still export food. As a result of trade, wages will fall in Australia and will rise in Sri Lanka. However, in this case, the wages in Australia will remain higher than in Sri Lanka, creating an incentive for migration from the latter to the former country.

Question 42

Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins
A) wages should fall and rents should rise in H.
B) wages and rents should fall in H.
C) wages should rise and rents should fall in H.
D) rent will be unchanged but wages will rise in H.
E) wages and rents should rise in H.

Answer 42

C) wages should rise and rents should fall in H

Question 43

Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. According to the Heckscher-Ohlin model
A) European landowners should support U.S.-European free trade.
B) the U.S. should compensate European countries once trade commences.
C) European capitalists should support U.S.-European free trade.
D) all landowners should support free trade.
E) all capitalists in both countries should support free trade.

Answer 43

C) European capitalists should support U.S.-European free trade.

Question 44

International trade has strong effects on income distributions. Therefore, international trade A) will be beneficial to all those engaged in international trade.
B) will tend to hurt one trading country.
C) will tend to hurt everyone in both countries.
D) will tend to hurt some groups in each trading country. E) is beneficial to everyone in both trading countries.

Answer 44

D) will tend to hurt some groups in each trading country.

Question 45

Factors tend to be specific to certain uses and products
A) in capital-intensive industries.
B) in labor-intensive industries.
C) in the short run.
D) in countries lacking fair labor laws.
E) in countries lacking comparative advantage.

Answer 45

C) in the short run.

Question 46

If the price of the capital -intensive product rises more than does the price of the land- intensive product, then
A) demand will shift away from the capital-intensive product, and its production will decrease.
B) the relative price of the capital-intensive product will fall to some point between the pretrade relative prices.
C) the country that exports the capital-intensive good will lose its comparative advantage.
D) demand will shift away from the capital-intensive product, and its production will decrease relative to that of the land-intensive product.
E) the production of the capital-intensive product will decrease, but by less than production of the land-intensive product.

Answer 46

B) the relative price of the capital-intensive product will fall to some point between the pretrade relative prices.

Question 47

If trade opens up between the two formerly autarkic countries, Australia and Belgium, then
A) the real income of both countries will increase.
B) the real income of neither country will increase.
C) the real income of Australia but not of Belgium will increase.
D) the real income of Australia and of Belgium will increase.
E) the real income of both countries may increase.

Answer 47

E) the real income of both countries may increase.