Question

In the Heckscher-Ohlin model with two large countries, the US and China; two goods, cloth, and...

In the Heckscher-Ohlin model with two large countries, the US and China; two goods, cloth, and wheat; and two factors, capital, and labor. The US is relatively capital abundant. Cloth is relatively labor-intensive. When these two countries move from autarky to trade with one another, we expect

A

a decrease in the relative price of wheat to cloth in the US and an increase in the relative price of wheat to cloth in China.

B

an increase in the relative price of wheat to cloth in both countries.

C

an increase in the relative price of wheat to cloth in the US and a decrease in the relative price of wheat to cloth in China.

D

a decrease in the relative price of wheat to cloth in both countries.

In the Heckscher-Ohlin model, as a relatively labor abundant country moves from autarky to trade, what happens to real wages and real prices of capital?

A

Real wages and real prices of capital decrease.

B

Real wages decrease and real prices of capital increase.

C

Real wages increase and real prices of capital decrease.

D

Real wages and real prices of capital increase.

E

We cannot determine this without knowing what good is relatively capital intensive in production.

Consider the Heckscher-Ohlin model with a relatively labor abundant country trading with a relatively capital abundant country. Both countries are producing both goods. Which of the following statements is correct in a trading equilibrium between these two countries?

A

The relatively labor abundant country will have a higher real wage expressed in units of its export good and a lower real wage expressed in units of its import good than the relatively capital abundant country.

B

The two countries will have the same real wages expressed in units of both goods.

C

The relatively labor abundant country will have lower real wages expressed in units of both goods than the relatively capital abundant country.

D

The relatively labor abundant country will have higher real wages expressed in units of both goods than the relatively capital abundant country.

Homework Answers

Answer #1

option C is correct. US is abundant in capital so it is likely to export the good that uses the capital intensively. In this case cloth is labor intensive which means wheat is capital intensive and the US is likely to export wheat. According to the model, when the country will export the product which uses its abundant factor intensively then its demand increases and in the US the relative price of this product increases. Therefore in this case the relative price of wheat will increase in US and decrease in China

Option C. If the labor abundant country is starting trade in the model then it will export the product which uses its labor intensively and this indicates that the real wage rate should increase while the real price of capital should decrease

Option B.

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