Question

Determine whether each of the following statements is TRUE or FALSE. Justify all the answers in few sentences.

3. In the Heckscher-Ohlin model with 2 goods (C and F), 2 factors (Capital and Labor), and 2 countries (Home and Foreign), where home exports C and C is capital-intensive (and there are no trade costs): (a) Assuming that there is factor substitution, if there is complete specialization in both countries then the wage must be the same in both countries. (b) If workers migrate from one country to another and both countries remain incompletely specialized before and after the migration, then factor prices do not change. (c) It is not possible for a country to be incompletely specialized and have positive exports. (d) If a tariff is introduced at home, workers in foreign are worse off.

Answer 1

a) "False"

The wages will be low in the labor intensive nation and high in the capital intensive nation. Even after specialization.

b) "False"

If the labors migrate the wages in the capital intensive nation will fall and in the labor intensive nation.

c) "False"

The nation will specialize to the point where the opportunity cost of production of the other good is positive. It can be incomplete but the trade can be done and it will be positive

d) "True"

If the nation puts tariff and the home nation is importing labor goods, a tariff will harm the import and affect the labor adversely.