International Economics, 7e (Husted/Melvin)



International Economics, 7e (Husted/Melvin)

Chapter 4 The Heckscher-Ohlin Theory

Multiple-Choice Questions

1)

According to the Heckscher-Ohlin (HO) model the source of comparative advantage is a country's

A)

technology.

B)

advertising.

C)

factor endowments.

D)

Both A and C.

Answer:

C

2)

The HO model rules out the classical model's basis for trade by assuming that ________ is (are) identical between countries.

A)

factor endowments

B)

factor intensities

C)

technology

D)

opportunity costs

Answer:

C

3)

If tastes are identical between countries, then comparative advantage is determined by

A)

supply conditions only.

B)

demand conditions only.

C)

supply and demand conditions.

D)

Can't tell without more information.

Answer:

A

4)

The HO theorem states that a country will have comparative advantage in the good whose production is relatively intensive in the ________ with which the country is relatively abundant.

A)

tastes

B)

technology

C)

factor

D)

opportunity costs

Answer:

C

Answer the question(s) below based on the following diagram of a country that is in international trade equilibrium.

[pic]

5)

Refer to the figure above. This country has comparative advantage in

A)

X.

B)

Y.

C)

both X and Y.

D)

Can't tell without more information.

Answer:

A

6)

Refer to the figure above. This country's exports equal

A)

CE units of X.

B)

GH units of Y.

C)

CD units of X.

D)

DE units of Y.

Answer:

C

7)

Refer to the figure above. This country's imports equal

A)

CE units of X.

B)

GH units of Y.

C)

CD units of X.

D)

DE units of Y.

Answer:

B

8)

Refer to the figure above. Which of the following is true?

A)

This country is completely specialized in the production of X.

B)

This country consumes at point F.

C)

The value of this country's consumption equals the value of its production.

D)

None of the above.

Answer:

C

9)

Refer to the figure above. If Y is labor intensive then according to the HO theory, this country should be ________ abundant.

A)

capital

B)

labor

C)

both capital and labor

D)

Can't tell without more information

Answer:

A

10)

Refer to the figure above. If this country is labor abundant, then according to the HO theory good X should be ________ intensive.

A)

capital

B)

labor

C)

both capital and labor

D)

Can't tell without more information

Answer:

B

11)

One of the predictions of the HO model is that

A)

countries with different factor endowments but similar technologies and preferences will have a strong basis for trade with each other.

B)

countries will tend to specialize, but not completely, in their comparative advantage good.

C)

reciprocal demand leads to an equilibrium terms of trade by inducing changes in both demand and supply.

D)

All of the above.

Answer:

D

12)

According to the Rybczynski theorem, at constant world prices, if a country experiences a gain in its capital stock it will produce

A)

more of the capital intensive good and less of the labor intensive good.

B)

more of both goods.

C)

less of the capital intensive good and more of the labor intensive good.

D)

less of both goods.

Answer:

A

13)

According to the factor price equalization theorem, if A is labor abundant, then once trade opens

A)

wages and rents should fall in A.

B)

rents and rents should rise in A.

C)

wages should rise and rents should fall in A.

D)

wages should fall and rents should rise in A.

Answer:

C

14)

According to the factor price equalization theorem, if B is labor abundant, then once trade B begins with A

A)

wages and rents should fall in A.

B)

rents and rents should rise in A.

C)

wages should rise and rents should fall in A.

D)

wages should fall and rents should rise in A.

Answer:

D

15)

According to the factor price equalization theorem, the ________ factor should oppose free trade policies in any given country.

A)

abundant

B)

scarce

C)

neither

D)

Can't tell without more information

Answer:

B

16)

Let Kj and Lj denote the capital and labor stocks of country j (j=A,B), then A is said to be capital abundant relative to B if

A)

KA > KB.

B)

KA/LA > KB/LB.

C)

LA < LB.

D)

All of the above.

Answer:

B

17)

Let Kj and Lj denote the capital and labor inputs in the production of good j (j=S,T), then S is said to be capital intensive relative to T if

A)

KS > KT.

B)

KS/LS > KT/LT.

C)

LS < LT.

D)

All of the above.

Answer:

B

18)

According to the HO model,

A)

everyone automatically gains from trade.

B)

the gainers from trade outnumber the losers from trade.

C)

the scarce factor necessarily gains from trade.

D)

None of the above.

Answer:

B

19)

The HO model assumes that ________ are identical between countries.

A)

tastes

B)

technology sets

C)

factor endowments

D)

Both A and B

Answer:

D

20)

The assumption of increasing opportunity costs in the HO model increases the likelihood that

A)

there will be incomplete specialization in production after trade begins.

B)

countries will be better off with free international trade.

C)

countries will maximize their standards of living from free international trade.

D)

All of the above.

Answer:

A

21)

The HO model predicts that once trade begins factor prices will equalize between countries. This result occurs because of the assumption of

A)

identical technology sets available to each country.

B)

constant opportunity costs.

C)

one factor of production.

D)

free international mobility of factors.

Answer:

A

22)

Suppose that there are two factors, capital and land, and that the United States is relatively capital abundant while Canada is relatively land abundant. According to the HO model,

A)

Canadian landowners should support Canada-U.S. free trade.

B)

Canadian capitalists should oppose Canada-U.S. free trade.

C)

U.S. capitalists should support Canada-U.S. free trade.

D)

All of the above.

Answer:

D

23)

Which of the following is false?

A)

International differences in tastes, if sufficiently large, could overturn the comparative advantage predictions of the HO model.

B)

The classical and HO models make similar assumptions about international differences in technology.

C)

The HO model predicts that some groups will be hurt by international trade.

D)

Both the classical and the HO models predict that countries gain from international trade.

Answer:

B

24)

Which of the following is true?

A)

In the HO model complete specialization in the production of exports is a likely outcome of international trade.

B)

In the classical model, complete specialization seldom occurs due to the assumption of increasing opportunity costs.

C)

Complete specialization is more likely if opportunity costs change little as the production point moves closer to either axis.

D)

All of the above are true.

Answer:

C

25)

In the HO model, the production possibility frontier is bowed out due to the assumption of

A)

identical tastes.

B)

different factor intensities in the production of the two goods.

C)

increasing returns to scale.

D)

Two of the above.

Answer:

B

True or False Questions

1)

Country A is labor abundant relative to country B if it has a larger labor force than B's.

Answer:

False

Explanation:

The ratio of labor to capital determines abundance.

2)

According to the Rybczynski theorem, if a country increases its endowment of capital and prices remain constant, then its output of both the capital and labor intensive goods will rise.

Answer:

False

Explanation:

None Given

3)

Tastes are assumed to be identical across countries to rule out differences in demand determining the direction of trade.

Answer:

True

Explanation:

None Given

4)

Both the classical and the HO model predict that the pattern of trade is determined largely by international differences in factor endowments.

Answer:

False

Explanation:

None Given

5)

The assumption that the two goods are made using different factor intensities raises the likelihood of incomplete specialization after trade begins.

Answer:

True

Explanation:

It introduces increasing opportunity costs into the model.

6)

In the HO model, reciprocal demand leads to an equilibrium price by inducing changes in both demand and supply.

Answer:

True

Explanation:

None Given

7)

According to the factor price equalization theorem, free international trade will result in wages equating rents worldwide.

Answer:

False

Explanation:

None Given

8)

If the factor price equalization theorem is true then, eventually, U.S. wages will fall to the level found today in the least developed countries of the world.

Answer:

False

Explanation:

Technology differences exist, negating HO predictions.

9)

According the Stolper Samuelson theorem, the scarce factor in any given country should oppose international trade by that country.

Answer:

True

Explanation:

None Given

10)

Even if some people are hurt by international trade, the HO model predicts that free international trade improves the standard of living for the country as a whole.

Answer:

True

Explanation:

None Given

Essay Questions

1)

France is capital abundant and Italy is labor abundant. Shoes are labor intensive and wheat is capital intensive. Draw diagrams to illustrate the pre- and post- trade equilibria for each of the two countries including the production points, the consumption points, the international price, and the volumes of exports and imports for each. Be sure to identify which country has comparative advantage in which good. Which factors gain and which lose when trade is opened between the two countries? Explain carefully.

Answer:

France

[pic]

[pic]

France has a comparative advantage in wheat. It will export X[pic]- V[pic]units of wheat and import C[pic]- V[pic] units of shoes. Trade benefits owners of capital and hurts labor in France. This occurs because production has shifted towards the more capital-intensive good thus lowering the demand for labor and increasing the demand for capital. As a result, wages fall and the return to capital rises.

Italy

[pic]

[pic]

Italy has a comparative advantage in shoes. It will export X[pic]- V[pic]units of shoes and import C[pic]- V[pic] units of wheat. Trade benefits labor and hurts owners of capital in Italy. This occurs because production has shifted to the labor-intensive good thus increasing the demand for labor and decreasing the demand for capital. As a result, wages rise and the return to capital falls.

2)

Explain how free international trade tends to lead to factor price equalization under the assumptions of the HO model? What does this process predict about which groups should be in favor of or opposed to free international trade?

Answer:

Free international trade leads in each country to the expansion in the production of that country's comparative advantage good and a contraction in the production of its comparative disadvantage good. At existing commodity prices there will be an excess demand for the country's abundant factor and an excess supply of its scarce factor. This will cause a change in relative prices in both countries moving each toward the other's. In the end, because factors are equally productive across countries (identical technology), prices will be equalized. Therefore, scarce factors should oppose free trade because it lowers their payments, while abundant factors should favor free trade.

3)

Explain carefully why the assumption of identical technology worldwide eliminates the classical basis for international trade.

Answer:

In the classical model, differences in technology between the two countries lead to differences in autarky prices. If one were to replace that assumption with the HO assumption of identical technologies, the autarky prices would be identical, and there would be no reason for trade to begin between the two countries.

4)

Compare and contrast the classical and HO theories of international trade.

Answer:

Similarities Differences

Both predict that trade raises HO predicts scarce factor loses.

standards of living.

HO predicts incomplete

specialization.

Both predict that trade causes

production of exports to expand HO gives a role for demand in

and importables to contract. determining the international terms

of trade.

HO assumes identical technology.

HO predictions about trade flows.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download