Chapter 8

Question 1

Assumptions of the Heckcher-Ohlin Theory

Answer 1

1. Two-nations, two commodities, and two factors of production
2. Both nations use the same technology in production
3. Commodity X is labor intensive and commodity Y is capital intensive
4. Both commodities are produced under constant returns to scale in both nations
5. There is incomplete specialization in production in both nations. Even with free trade both nations continue to produce both commodities
6. Tastes are equal in both nations.(The shape and location of Indifference curves are identical in both nations)
7. There is perfect competition in both commodities and factor markets in both Nations
8. There is perfect mobility of factors within each nation but no international factor mobility.
9. There are no transportation costs, tarrifs, or other barriers to free international trade.
10. All resources are fully employed in both nations.There are no unemployed resources or factors of production in either nation.
11. International trade between the two nation is balanced.The total value of each nation’s exports equals the total value of the nation’s imports

Question 2

The assumption of perfect competition in Heckscher-Ohlin Theory means.

Answer 2

1. Two nations are too small to affect the price
2. In long-run p=cost no economic profit
3. Perfect Knowledge

Question 3

Commodity Y is capital intensive if.

Answer 3

Capital-labor ratio (K/L) used in the production of Y is greater than (K/L) used in the production of X.

Question 4

To measure the capital and labor intensity of the two commodities, it shouldn’t be measured in absolute terms but by

Answer 4

the amount (ratio) of capital per unit of labor

(i.e., K/L)

Question 5

Two ways to define factor abundance

Answer 5

1. In terms of physical units
2. Relative factor prices

Question 6

Nation 2 is capital abundant in terms of physical units if

Answer 6

The ratio of the total amount of capital to the total amount of labor (TK/TL) available in Nation 2 is greater than that in Nation 1

Question 7

Nation 2 can have less capital than Nation 1 and still be the capital abundant nation if

Answer 7

TK/TL in Nation 2 exceeds TK/TL in Nation 1

Question 8

Nation 2 is capital abundant in terms of relative factor prices if

Answer 8

the ratio of the rental price of capital to the price of labor (Pk/Pl) is lower in Nation 2 than in Nation 1

i.e., if Pk/Pl in Nation 2 is smaller than Pk/Pl in Nation 1

Question 9

Rental price of capital is usually taken to be

Answer 9

the interest rate (r)

Question 10

price of labor time is

Answer 10

the wage rate (w)

Question 11

Pk/PL can be written as

Answer 11

r/w

Question 12

It is not the absolute level of r that determines whether or not a nation is the K-abundant nation, but

Answer 12

r/w

Question 13

The definition of factor abundance in terms of physical units considers only

Answer 13

the supply of factors

Question 14

The definition of factor abundance in terms of physical units and in terms of factor prices may not give the same conclusion if

Answer 14

Demand is significantly different between the two countries

Question 15

If demand is significantly different between the two countries then which definition should be used

Answer 15

relative factor prices

Question 16

The two definitions of factor abundance give the same conclusions if

Answer 16

we have assumed that tastes, or demand preferences are the same in both nations

Question 17

If Nation 2 is K-abundant nation and commodity Y is the K-intensive commodity, then Nation 2 can

Answer 17

Produce relatively more of commodity Y than Nation 1.

Question 18

If Nation 1 is the L-abundant nation and commodity X is the L-intensive commodity, then Nation 1 can

Answer 18

produce relatively more of commodity X than Nation 2

Question 19

Production possibility frontier for nation 1 ____________ than the production frontier of Nation 2
(if we measure X along the horizontal axis)

Knowing that Nation 1 is L-abundant

Answer 19

is relatively flatter and
wider

Question 20

The Heckscher-Ohlin (H-O) theory can be presented in two theorems

Answer 20

1.The H-O theorem (which deals with and predicts the pattern of trade)
2. The factor-price equalization theorem (Paul Samuelson) (which deals with the effect of
international trade on factor prices)

Question 21

The H-O theorem:
Pattern of trade:

Answer 21

A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor

Question 22

According to H-O theorm, The relatively labor-rich nation exports

Answer 22

The relatively labor-intensive commodity

Question 23

According to H-O theorm, The relatively labor-rich nation imports

Answer 23

The relatively capital-intensive
commodity.

Question 24

Which theorm explains comparative advantage rather than assuming it

Answer 24

The H-O theorm

Question 25

The H-O model is often referred to as the

Answer 25

Factor proportions or factor endowment theory.

Question 26

What is the basic cause of comparative advantage and international trade according to H-O theorm

Answer 26

Relative factor abundance, or factor endowments

Question 27

According to the H-O theorem, what is the cause of pre-trade difference in relative commodity prices between two nations

Answer 27

The difference in relative
factor abundance and prices

Question 28

According to the Heckscher-Ohlin model Indifference curve I is common to both nations because

Answer 28

of the assumption of equal tastes

Question 29

The tangency of Indifference curve I to the production frontier of Nation 1 at point A define

Answer 29

The no trade equilibrium-relative commodity price of PA in Nation 1

Question 30

The tangency of Indifference curve I to the production frontier of Nation 2 at point A’ define

Answer 30

The no trade equilibrium-relative commodity price of PA’ in Nation 2

Question 31

Nation 1 has a comparative advantage in commodity X and Nation 2 in commodity Y if

PA and PA’ are the equilbrim price of nation 1 and 2 respectively

Answer 31

PA < PA’

Question 32

According to H-O theorm, With trade Nation 1 produces at point B, but where is point B?

Answer 32

Further right on Nation’s 1 PPF

Indicating that it increases the production of X

Question 33

PA and PA’ are

Answer 33

Tangent lines to the PPF at equilibrium point that determine the slope

Question 34

Nation 1 can reach point E by

Answer 34

producing at point B and by
exchanging X for Y

Question 35

According to H-O theorm, With trade Nation 2 produces at point B’, but where is point B’?

Answer 35

Further to the left on the Nation’s 2 PPF

Indicates that nation 2 increased the production of Y

Question 36

Nation 2 can reach point E by

Answer 36

producing at point B’ and by exchanging Y for X

Question 37

According to heckscher-ohlin model, Both nations gain from trade because

Answer 37

they consume on
higher indifference curve II