Model
Multiple Choice Questions
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) None of the above. Answer: D
In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in (a) tastes.
(b) military capabilities. (c) size.
(d) relative availabilities of factors of production. (e) labor productivities. Answer: D 3.
In the 2-factor, 2 good Heckscher-Ohlin model, a change from autarky (no trade) to trade will benefit the owners of (a) capital.
(b) the relatively abundant factor of production. (c) the relatively scarce factor of production. (d) the relatively inelastic factor of production.
(e) the factor of production with the largest elasticity of substitution. Answer: B 4.
In the 2-factor, 2 good Heckscher-Ohlin model, a change from autarky (no trade) to trade (a) will tend to make the wages in both countries more similar. (b) will equalize the wages in both countries.
(c) will tend to make the wages in both countries less similar. (d) will tend to make wages equal to returns to capital. (e) will tend to make rents equal to interest rates. Answer: A
2.
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 33
5.
The Leontieff Paradox
(a) supported the validity of the Ricardian theory of comparative advantage. (b) supported the validity of the Heckscher-Ohlin model. (c) failed to support the validity of the Ricardian theory.
(d) failed to support the validity of the Heckscher-Ohlin model. (e) proved that the U.S. economy is different from all others. Answer: D
The Leontieff Paradox
(a) refers to the finding that U.S. exports were more labor intensive than its imports. (b) refers to the finding that U.S. Exports were more capital intensive than its exports. (c) refers to the finding that the U.S. produces outside its Edgeworth Box. (d) still accurately applies to today’s pattern of U.S. international trade.
(e) refers to the fact that Leontieff—an American economist—had a Russian name. Answer: A
The 1987 study by Bowen, Leamer and Sveikauskas (a) supported the validity of the Leontieff Paradox.
(b) supported the validity of the Heckscher-Ohlin model. (c) used a two-country and two-product framework.
(d) demonstrated that in fact countries tend to use different technologies. (e) proved that the U.S.’s comparative advantage relied on skilled labor. Answer: A
Empirical observations on actual North-South trade patterns tend to (a) support the validity of the Leontieff Paradox.
(b) support the validity of the Heckscher-Ohlin model. (c) support the validity of the Rybczynski Theorem.
(d) support the validity of the wage equalization theorem.
(e) support the validity of the neo-imperialism exploitation theory. Answer: B
The Case of the Missing Trade refers to
(a) the 9th volume of the Hardy Boys’ Mystery series.
(b) the fact that world exports does not equal world imports.
(c) the fact that factor trade is less than predicted by the Heckscher-Ohlin theory.
(d) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists. (e) None of the above. Answer: C
6.
7.
8.
9.
34 Krugman/Obstfeld • Seventh Edition
10. If the Unted States had relatively more capital per worker than Mexico, and if the Leontieff Paradox
applied to this trade, then a successful expansion of trade under NAFTA between Mexico and the United States would tend to benefit which group in the United States? (a) Environmentalists (b) Capitalists (c) Workers (d) Land owners
(e) Skilled labor with relatively high levels of human capital Answer: C 11. According to the Heckscher-Ohlin model, the source of comparative advantage is a country’s
(a) technology. (b) advertising. (c) human capital. (d) factor endowments. (e) Both (a) and (b).
Answer: D
12. The Hechscher-Ohlin model states that a country will have a comparative advantage in the good or
service whose production is relatively intensive in the ______ with which the country is relatively abundant. (a) tastes
(b) technology
(c) factor of production (d) opportunity cost (e) scale economy Answer: C 13. 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 of production endowments (b) scale economies
(c) factor of production intensities (d) technology
(e) opportunity costs
Answer: D
14. According to the Hecksher-Ohlin model,
(a) everyone automatically gains from trade (b) the scarce factor necessarily gains from trade
(c) the gainers could compensate the losers and still retain gains. (d) a country gains if its exports have a high value added. (e) None of the above. Answer: C
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 35
15. The Heckscher-Ohlin model assumes that _____ are identical in all trading countries
(a) tastes
(b) technologies
(c) factor endowments (d) Both (a) and (b). (e) None of the above. Answer: B
16. As opposed to the Ricardian model of comparative advantage, the assumption of diminishing returns
in the Heckscher-Ohlin model means that the probability is greater that with trade (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 is primarily supply related. (e) None of the above. Answer: A 17. Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively
labor abundant, then once trade begins (a) wages 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) wages should fall and rents should rise in H. (e) None of the above.
Answer: C
18. Which of the following is false (for the Heckscher-Ohlin model)?
(a) If tastes are not identical in both countries, wages may still equalize. (b) Differences in technologies could be the source of gains from trade. (c) Some groups may gain and some may lose due to trade.
(d) Gains for the trade-related winners will tend to be larger than losses of losers. (e) None of the above. Answer: B 19. If tastes differed between countries, this could affect
(a) wage equalization due to trade with no specialization. (b) the direction of trade (who exports what to whom).
(c) the fact that some groups in a country might lose welfare due to trade. (d) the fact that the country as a whole will gain from trade. (e) None of the above. Answer: B
36 Krugman/Obstfeld • Seventh Edition
20. 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) European capitalists should support U.S.-European free trade. (c) all capitalists in both countries should support free trade. (d) all landowners should support free trade. (e) None of the above. Answer: B 21. According to the Heckscher-Ohlin model, if the United States is richly endowed in human-capital
relative to Mexico, then as NAFTA increasingly leads to more bilateral free trade between the two countries,
(a) the United States will find its industrial base sucked into Mexico.
(b) Mexico will find its relatively highly skilled workers drawn to the United States. (c) The wages of highly skilled U.S. workers will be drawn down to Mexican levels. (d) The wages of highly skilled Mexican workers will rise to those in the United States. (e) The wages of highly skilled Mexican workers will fall to those in the United States. Answer: E 22. Assume that only two countries, A and B, exist.
Consider the following data:
Factor Endowments Labor Force Capital Stock
Countries A 45 15
B 20 10
If good S is capital intensive, then following the Heckscher-Ohlin Theory, (a) country A will export good S. (b) country B will export good S. (c) both countries will export good S.
(d) trade will not occur between these two countries. (e) Insufficient information is given. Answer: B
23. Continuing from Question #22, if you are told that Country B is very much richer than Country A,
then the correct answer is:
(a) country A will export good S. (b) country B will export good S. (c) both countries will export good S.
(d) trade will not occur between these two countries. (e) insufficient information is given. Answer: B
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 37
24. Continuing from Question #22, you are told that Country B is very much larger than country A. The
correct answer is:
(a) country A will export good S. (b) country B will export good S. (c) both countries will export good S.
(d) trade will not occur between these two countries. (e) insufficient information is given. Answer: B 25. Continuing from Question #22, you are told that Country B has no minimum wage or child labor
laws. Now the correct answer is: (a) country A will export good S. (b) country B will export good S. (c) both countries will export good S.
(d) trade will not occur between these two countries. (e) Insufficient information is given.
Answer: B
26. Continuing from Question #22, you now are told that the labor unions representing the workers in
each of the two respective countries are considering lobbying against the opening of international trade between these two countries. Note that workers’ income is derived solely from wages.
(a) This would be a misguided decision from the viewpoint of the workers in both countries, since
trade is always better than autarky.
(b) This would be a good decision from the viewpoint of workers in Country A since international
trade helps the capitalists and hurts the workers.
(c) This would be a good decision from the viewpoint of workers in Country B since international
trade helps the owners of capital and hurts the workers.
(d) This would be a good decision for both unions since trade hurts workers wherever they live. (e) None of the above. Answer: C 27. We are now told that the information given us in Question #22 was not exactly accurate, and that in
fact S is relatively capital intensive only when relative wages are high, but becomes relatively labor intensive when relative wages are low. Given this information: (a) country A will export good S. (b) country B will export good S. (c) both countries will export good S.
(d) trade will not occur between these two countries. (e) Insufficient information is given. Answer: E
38 Krugman/Obstfeld • Seventh Edition
28. The following are all assumptions that must be accepted in order to apply the Heckscher-Ohlin
Theory, except for one:
(a) countries differ in their endowments of factors of production. (b) countries differ in their technologies. (c) there are two factors of production.
(d) production is subject to constant returns to scale.
(e) one product always requires more machines per worker in its production than does the other
product. Answer: B 29. In international-trade equilibrium in the Heckscher-Ohlin model,
(a) 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.
(b) the capital rich country will charge the same price for the capital intensive good as that paid for
it by the capital poor country.
(c) 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.
(d) the workers in the capital rich country will earn more than those in the poor country. (e) the workers in the capital rich country will earn less than those in the poor country.
Answer: B
30. If two countries were very different in their relative factor availabilities, then we would not expect
which of the following to be empirically supported? (a) The Heckscher-Ohlin Theorem
(b) The Factor Price Equalization Theorem. (c) The Law of One Price (d) The Law of Demand (e) None of the above. Answer: B 31. When Country A produces both goods more efficiently than Country B, then
(a) country A should produce both goods and not trade.
(b) country A should specialize in its good of least absolute disadvantage. (c) both countries would benefit from autarky. (d) both countries may not benefit from trade. (e) None of the above.
Answer: E
32. The minimum information required to determine Country A’s comparative advantage is
(a) the number of hours of labor in the economy of A. (b) ratio of labor inputs for products S and T in A.
(c) total available labor, labor required per unit of S, and labor required per unit of T in A. (d) total available labor and the ratio of labor inputs for S and T in A. (e) None of the above.
Answer: E
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 39
33. The slope of a country’s PPF reflects
(a) the opportunity cost of product S in terms of product T. (b) the opportunity cost of T in terms of money prices. (c) the opportunity cost of S or T in terms of S. (d) Both (a) and (b). (e) Both (a) and (c). Answer: A
34. The Heckscher-Ohlin model predicts all of the following except:
(a) which country will export which product.
(b) which factor of production within each country will gain from trade. (c) the volume of trade.
(d) that wages will tend to become equal in both trading countries. (e) None of the above.
Answer: C
35. The 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) None of the above.
Answer: C
36. International trade has strong effects on income distributions. Therefore, international trade
(a) is beneficial to everyone in both trading countries. (b) will tend to hurt one trading country.
(c) will tend to hurt some groups in each trading country. (d) will tend to hurt everyone in both countries.
(e) will be beneficial to all those engaged in international trade. Answer: C 37. Factors tend to be specific to certain uses and products
(a) in countries lacking comparative advantage. (b) in the short run.
(c) in capital-intensive industries. (d) in labor-intensive industries.
(e) in countries lacking fair labor laws. Answer: B
40 Krugman/Obstfeld • Seventh Edition
38. 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) demand will shift away from the capital-intensive product, and its production will decrease
relative to that of the land intensive product.
(c) the production of the capital-intensive product will indeed decrease, but not for the reasons
mentioned in (a) or (b).
(d) the countries exporting the capital-intensive good will lose its comparative advantage. (e) None of the above.
Answer: E
39. If Australia has relatively more land per worker, and Belgium has relatively more capital per worker,
then if trade were to open up between these two countries,
(a) the relative price of the capital-intensive product would rise in Australia.
(b) the world price of the land-intensive product would be higher than it had been in Belgium. (c) the world price of the land intensive product would be higher than it had been in Australia. (d) the relative price of the land intensive product would rise in Belgium. (e) None of the above. Answer: C 40. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were
to open up between these two countries,
(a) the real income of capital owners in Australia would rise. (b) the real income of labor in Australia would clearly rise. (c) the real income of labor in Belgium would clearly rise. (d) the real income of landowners in Belgium would fall.
(e) the real incomes of capital owners in both countries would rise. Answer: D 41. If trade opens up between the two formerly autarkic countries, Australia and Belgium, then
(a) the real income of Australia and of Belgium will increase. (b) the real income of Australia but not of Belgium will increase. (c) the real income of neither country will increase. (d) the real income of both countries may increase. (e) the real income of both countries will increase.
Answer: D
42. If the price of food (a land intensive product) rises, then the income of capital owners will fall
because
(a) capital owners consume only food.
(b) the real wage in terms of manufactures rises.
(c) they must pay higher wages to maintain subsistence levels. (d) food is an element of organic capital for capitalists. (e) None of the above.
Answer: B
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 41
43. If Japan is relatively capital rich and the United States is relatively land rich, and if food is relatively
land intense then trade between these two, formerly autarkic countries will (a) lead to perfect specialization with Japan alone producing manufactures. (b) create a world relative price of food that is lower than that of the U.S. (c) lower the price of food in both countries. (d) raise the price of food in both countries. (e) None of the above. Answer: E 44. The reason trade clearly benefits a country is that
(a) it raises the real income of the more productive elements in society. (b) it lowers the real income of the less productive elements in society. (c) it increases the levels of consumption of everyone. (d) it increases society’s consumption choices. (e) None of the above. Answer: D 45. As compared to potential gainers, those who stand to lose from trade
(a) are likely to migrate to another country.
(b) tend to be more effectively organized politically.
(c) tend to reject compensation as smacking of socialism.
(d) are universally opposed by economists who consider them parasites. (e) None of the above.
Answer: B
46. Those who stand to gain from trade
(a) do not really care about the issue of income redistribution.
(b) could not compensate losers since there are so many poor people.
(c) could compensate losers but would rather not in modern industrial economies.
(d) compensate losers at least partially through such legislation as unemployment compensation, or
retraining grants. (e) None of the above. Answer: D 47. Groups that lose from trade tend to lobby the government to
(a) shift the direction of comparative advantage.
(b) abolish the Specific Factor model from practical application. (c) provide public support for the relatively efficient sectors. (d) provide protection for the relatively inefficient sectors. (e) None of the above. Answer: D
42 Krugman/Obstfeld • Seventh Edition
48. It was found that when the United States imposed steel quotas, this caused harm not only to steel
consumers, but also to many producers for whom steel is an important input. This insight
(a) suggests that general equilibrium models of tariffs will demonstrate that the partial equilibrium
deadweight loss triangles tend to overstate the tariff harm.
(b) suggests that the deadweight loss triangles from partial equilibrium models tend to understate
the harm to society of protectionism.
(c) suggests that it is quite sensible that producers tend to support quotas. (d) suggests that steel production is an infant industry in the U.S. (e) None of the above.
Answer: B
49. It was found that when the United States placed quotas on imported Japanese semiconductors, this
harmed the international competitiveness of U.S. computer manufacturers. This is a good illustration of the principle that
(a) trade benefits the factor that is specific to the export sector. (b) protectionism helps manufacturers but harms consumers.
(c) protectionism harms the factor that is specific to the export sector.
(d) effective protection is not the same as a nominal tariff or tariff equivalent. (e) None of the above.
Answer: D
50. Ricardo’s model of comparative advantage demonstrated no harm to any group in the economy
as a result of free trade. This was probably because
(a) Ricardo did not understand the concept of diminishing returns. (b) the specific factor model had not yet been invented. (c) Heckscher and Ohlin had not yet been born.
(d) a model, which demonstrated such harm, would have been counter-productive to Ricardo’s
political or polemical aims. (e) None of the above. Answer: D 51. When the Napoleonic Wars were over, the Corn Laws were enacted in England. This may be
understood in terms of the following: (a) The Hecksher-Ohlin model. (b) The intra-trade model.
(c) The monopolistic competition model (d) The scale economies model (e) None of the above. Answer: A
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 43
52. If Gambinia has many workers but very little land and even less productive capital, then, following
the specific factor model, we know that Gambinia has a comparative advantage in (a) manufactures. (b) food.
(c) both manufactures and food. (d) neither manufactures nor food. (e) Not enough information given. Answer: E 53. If, relative to its trade partners, Gambinia has many workers but very little land and even less
productive capital, then, following the specific factor model, in order to help the country’s economic welfare, the Gambinian government should (a) protect the manufacturing sector. (b) protect the agricultural sector. (c) protect both sectors.
(d) not resort to protectionism (e) None of the above.
Answer: D
Essay Questions
1.
“A good cannot be both land- and labor-intensive.” Discuss.
Answer: 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. 2.
“No country is abundant in everything.” Discuss.
Answer: the concept of relative (country) factor abundance is (like factor intensities) a relative
concept. When we identify a country as being capital intensive, 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 capital. 3.
There is frequently a conflict between short-term and long-term interests in trade. Discuss. Answer: In trade models, the short term is typically defined as that (conceptual) period of time in
which both the technology and the amount of factors of production are given and cannot be changed. When we state that free trade can be shown to be an optimal policy under certain circumstances, we mean that in the short run, this policy can bring a country to an optimum level of consumption. However, there is no inconsistency in the proposition that the optimum short run solution may not be the solution, which maximizes the likelihood of economic expansion or growth (the long run). For example, a policy which maximizes consumption may not take into account inter-temporal preferences, and hence may “short-change” future generations (or those who care for future generations).
44 Krugman/Obstfeld • Seventh Edition
4. International trade leads to complete equalization of factor prices. Discuss.
Answer: 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.
5.
Countries that are willing to tolerate an unusually high quantity of pollution relative to their supplies of other factors would tend to export “pollution-intensive” goods. Discuss using the Hechscher-Ohlin (H.O.) model.
Answer: This statement is badly crafted. It seems to imply that pollution per say is a proper factor
of production. That is, just as if you add a worker, you get additional product, so the marginal product of pollution is positive. The problem here is that pollution is not really a factor of production, but rather an externality, which may be more typical of imported goods than exported ones. In such a case, the statement above is false.
6. Countries do not in fact export the goods the H.O. theory predicts. Discuss.
Answer: This statement is not true. Although one may find many cases where it seems to be true
(e.g. the Leontieff Paradox), all one needs to do in order to render the above statement not (generally) true is to find one counter example. In fact, one can find large subsets of
agricultural and commodity products in which the H.O predictions are generally fulfilled. Labor-intensive countries such as Bangladesh do in fact export relatively labor-intensive goods. Capital-intensive countries such as Germany do in fact export capital-intensive products (at least to South countries). Countries such as Costa Rica (“sunshine abundant”) tend to export bananas (sunshine-intensive products). The U.S. (a wheat-land-abundant country) does indeed export wheat (a wheat-land intensive product). In fact, since the early 1980s, the Leontieff Paradox was not found to describe the U.S. trade data (hence ratifying the H.O. theory).
7. Why is the H.O. model called the factor-proportions theory?
Answer: 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.
8. Why do we observe the Leontief paradox?
Answer: There are many possible answers. They may be classified into three groups. One would
argue that the model, or theory is wrong. The other would argue that the theory is correct (internally consistent and descriptive of real world data), but the real world data is
incorrectly perceived, defined or measured. The third would argue that the statement itself is wrong, and that in fact the Leontieff paradox itself is not actually observed, but rather is due to faulty logical rendering of the original model.
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 45
9. Why are prices of factors of production not equalized?
Answer: Again this statement may or may not be argued to be true. On the one hand, the large
volume and growth in world trade between the United States and other OECD countries during the 50 years since World War II has clearly been related to a near universal (average) convergence in real wage levels in these countries, whereas the most obvious cases in which such a convergence did not take place (North-South countries) also happened to be cases in which trade was relatively small and “missing.”
There are many theoretical reasons why factor price equalization may not occur. If the relative country relative abundances are very different, then the theory itself does not
predict that the wage equalization will occur. The same is true of factor intensity reversals exist within relevant relative wage ranges. Dynamic migration models such as Harris-Todaro are another class of theory that may suggest that even if the static equilibrium solution does include the factor-price equalization, the dynamic path of the model may never reach this solution, so that when observed within any finite time frame, it a lack of equalization would exist.
10. “The H.O. model remains useful as a way to predict the income distribution effects of trade.”
Discuss.
Answer: The Stolper-Samuelson theorem, one of the basic theorems arising from the
Heckscher-Ohlin model yields an elegant demonstration of the fact that changes in product prices (such as will occur when trade is expanded or curtailed) telescopes its effects onto factor prices, so that not only do relative factor returns mirror product prices, but that actual returns to factors may either rise or fall in real terms. Hence, as a policy framework, the disproportionate effect trade may have on real incomes of sectors, such as skilled-labor is quite useful both theoretically and practically (or polemically). 11. It is claimed that the persistence of protectionism is often the result of the fact that those who lose
from trade are usually a much more informed, cohesive and motivated a group than those who gain. Give a specific example from “real life” that supports this claim.
Answer: The shift of shipbuilding comparative advantage in shipbuilding away from the U.S. has
caused economic damage to trained shipbuilders, as well as to owners of shipyards, and to peripheral businesses located near such shipyards. These groups, and their Congressional representatives will be very much aware of the damage being done. The gainers would be those who pay somewhat lower shipping charges, or lower retail prices due to the use of cheaper (foreign built) ships. Since shipping is typically a very small component of total retail cost, this gain will hardly be noticeable by any one single group in the economy. 12. One reason international trade has a powerful effect on the distribution of income within countries is
that some factors cannot move costlessly from one industry to another. What is another necessary condition for international trade to have such a strong effect on intra-country income distributions?
Answer: It is necessary that the relative factor intensities differ from industry to industry.
46 Krugman/Obstfeld • Seventh Edition
13. Even though it is very clear in the context of the Hecksher-Ohlin model that an expansion of
international trade will create losers as well as winners, economists still claim that the country as a whole gains. The general claim that a country gains even though some identifiable group within it systematically loses requires subjective judgements concerning the relative importance or weights to be given the economic welfares of individuals or groups. Do you believe that this is, in general scientifically or ethically possible to do? Explain your answer. In what sense, then, do economists nevertheless claim that the country as a whole gains?
Answer: This could be considered to be an intractable issue, for which modern welfare economics
really has no solution. For example, in the early 1980s, it was decided not to subject blood supplies to (at that time) very expensive tests for positive HIV factors, since it was decided that this would cause blood shortages for large numbers of people, and that the number of people who might gain from applying the stringent tests was very small. That is, the good of the many was deemed superior to the good of the few. Unfortunately, the few happened to be just about every person suffering from Hemophilia at that time. Almost all of these people died as a result. Was their need really less than the needs of the many
Quantitative/Graphing Problems
1.
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 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: 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.
Chapter 4 Resources and Trade: The Heckscher-Ohlin Model 47
2.
If trade were to open up between P and R, where would the world 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: 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.
3.
Now repeat the exercise but substitute country M for country R. How do the answers differ from those in question 2 above? Explain the reason for any differences you note.
Answer: All the answers are the same except 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.
4.
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: 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.
5.
Using the answers to question 4, can you guess which group of producers in Country P might lobby against free trade?
Answer: In Country P, the owners of the relatively scarce factor of production are the owners of
capital. Their relative and real incomes will decrease, and so they may well attempt to lobby for protectionism, which may prevent the country from moving to a free trade equilibrium.
6.
An Economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depends on labor input as follows: Labor Input to Good 1
0 10 20 30 40 50 60 70 80 90 100
Output of Good 1 0 25 38 49 58 66 73 79 84 87 89
Labor input to Good 2
0 10 20 30 40 50 60 70 80 90 100
Output of Good 2
0 40 53 62 70 77 83 88 92 95 96
48 Krugman/Obstfeld • Seventh Edition
(a) Graph the production functions for good 1 and good 2
(b) Graph the production possibility frontier. Why is it curved?
Answer: The production possibility frontier is curved because of the diminishing returns associated
with the expansion of output in the short run in each of the two industries. 7.
Using the table from Problem 6, calculate the marginal product of labor for each product, for different labor inputs.
Answer: e.g. at 50 workers, the marginal product for 1 is 0.75
For product 2 it is 0.65
At 90 workers, the marginal product for 1 is 0.25
For product 2 it is 0.15
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