Topic 3: The Heckscher-Ohlin Model

Question 1

rrWhat are the production constraints of an autarky country with this production table in the HO model, with:

• 1000 units of labour.
• 1200 units of capital.

Answer 1

a_LCQ_C + a_LDQ_D <= 1000

20Q_C + 6Q_D <= 1000

a_KCQ_C + a_KDQ_D <= 1200

40Q_C + 2Q_D <= 1200

Question 2

Show the Autarky production posibility graph for a country with 1000 labour, 1200 capital and the following production functions.

Answer 2

1. Calculate how many dresses can be made at max:

Labour Requirement = 1000/5 = 200
Capital Requirement = 1200/2 = 600

So labour constrained, production is 200.

2. Calculate how many cars can be made at max:

Labour = 1000/20 = 50
Capital = 1200/40 = 30

So capital constrained, production is 30.

3. Work down from dresses.

When dresses are at max, 200 are produced, consuming all labour and leaving 1200 - 200 x 2 = 800 capital spare.

When one more car is produced, 20 labour and 40 capital is consumed.
This requires 4 dresses (which yield 5 labour and 2 capital), which is the initial opportunity cost.

Capital is expended where (800 + 4*2Q_C) / 40 = Q_C
800/40 + 1/5Q_C = Q_C
20 =4/5Q_C, Q_C = 20 x 5 / 4 = 25.

Alternatively.

Curve one: Q_V = 200 - 4Q_C

When cars are fully produced, if one less is made, 40 capital is released, which allows 40/2 = 20 dresses to be produced. (Labour is spare.) The Y intercept of this graph then is 20 x 30 (latter being the max cars.) = 600.

Curve two: Q_V = 600 - 20Q_C

Solving….

200 - 4Q_C = 600 - 20Q_C

16Q_C = 400

Q_C = 400/16 = 25

Finally:

Q_V = 600 - 20 x 25 = 600 - 500 = 100.

Question 3

Demonstrate relative input demand through isoquant analysis.

Answer 3

Question 4

Show the HO model in equilibrium, with two goods, C, and D, where C is labour intensive, and the relative price p_C/p_D = 2, and w/r = 0.4.

Answer 4

Question 5

Which of the given isoquants are consistant with the previous graphs?

Question 6

In the substitutable HO model, what happens when there is an increase in the capital stock?

Answer 6

The production of cars expands, and the production of dresses necessarily falls (under constant prices).

Question 7

What does it mean for a country to be abundant in a resource?

Answer 7

That an economy will produce more of a good intensive in that resource than some other country. Meaningless without comparative countries.

Question 8

Graph relative supply and demand in Autarky. Show the resulting prices and quantities. Then show the world price if the countries open to trade.

Answer 8

A world relative supply curve is constructed, lying inbetween that of A & B.

Question 9

What is the Heckscher-Ohlin Theorum?

Answer 9

“The country that is abundant in a factor exports the good whose production is intensive in that factor”.

Question 10

What is the Stolper-Samuelson Theorem?

Answer 10

“A rise in the relative price of a good willl lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor.

Question 11

What is factor price equalization?

Answer 11

The prediction that the relative prices for two identical factors of production will eventually be equalized across countries because of international trade.

(Assuming identical production functions.)

Question 12

What is the Rybczynski Theorum?

Answer 12

“At constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute declien in the output of the other good.*

Question 13

How is the empirical evidence for the Heckscher-Ohlin model?

Answer 13

• The pure version explains very little.
• Considering the inputs as skilled vs. unskilled labour yields valuable predictions.