<Heckscher-Ohlin Theory>
Suppose that US has 2400 units of capital and 1600 units of labor, and that Sri Lanka has 600 units of capital and 560 units of labor. Also, suppose that production of each car requires 40 units of capital and 16 units of labor, and that production of each cloth requires 2 unit of capital and 4 units of labor. Suppose that the autarky wage rate and rent to capital in US each equal 30, and that the autarky wage rate and rent to capital in Sri Lanka are 10 and 50 respectively.
a. Which country is labor abundant and which one is capital abundant based on the physical definition of factor abundance? Explain. Which country is labor abundant and which one is capital abundant based on the price definition of factor abundance? Explain. Which commodity is labor intensive and which one is capital intensive? Explain.
b. What is the autarky relative price of a car (to a cloth) in each country? Which country has comparative advantage in which product? Does your answer illustrate the Heckscher-Ohlin theorem? Explain. Also, state this theorem in words.
<Heckscher-Ohlin Theory>
Suppose that US has 2400 units of capital and 1600 units of labor, and that Sri Lanka has 600 units of capital and 560 units of labor. Also, suppose that production of each car requires 40 units of capital and 16 units of labor, and that production of each cloth requires 2 unit of capital and 4 units of labor. Suppose that the autarky wage rate and rent to capital in US each equal 30, and that the autarky wage rate and rent to capital in Sri Lanka are 10 and 50 respectively.
a. Which country is labor abundant and which one is capital abundant based on the physical definition of factor abundance? Explain. Which country is labor abundant and which one is capital abundant based on the price definition of factor abundance? Explain. Which commodity is labor intensive and which one is capital intensive? Explain.
b. What is the autarky relative price of a car (to a cloth) in each country? Which country has comparative advantage in which product? Does your answer illustrate the Heckscher-Ohlin theorem? Explain. Also, state this theorem in words.
Related textbook solutions
Related questions
1. The capital stock in India is $22 trillion, and the labor force is 511 million people. The capital stock in Sri Lanka is $584 billion, and the labor force is 8 million people. Which country is relatively capital abundant?
A.India.
B.Sri Lanka
2. The capital to labor ratio in steel production in India and Sri Lanka is higher than the capital to labor ratio in textile production in both countries. We can say that the steel industry is
A.relatively capital abundant in both countries.
B.relatively capital intensive in both countries.
C.has a comparative advantage over the textile industry.
D.has an absolute advantage over the textile industry.
3. Using the data from the previous two problems, and assuming that the only two countries in the world are Sri Lanka and India, the Heckscher-Ohlin Theorem predicts that ________ , and the Stolper Samuelson Theorem predicts that _____________.
| A. |
India will export steel; labor in India will benefit from trade. |
|
| B. |
Sri Lanka will export steel; labor in Sri Lanka will benefit from trade. |
|
| C. |
India will export steel; capital owners in India will benefit from trade. |
|
| D. |
Sri Lanka will export steel; capital owners in Sri Lanka will benefit from trade. |
1. Use the information in the table below to answer the following questions.
| US | Argentina | |
| wheat | 300 | 20 |
| beef | 100 | 20 |
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
2. Suppose that China is labor-abundant country and U.S. is capital-abundant country. iPad is capital-intensive and cloth is labor-intensive. Show that U.S. exports iPad after opening up to trade using Heckscher-Ohlin model.
3. Explain the immiserizing growth using standard trade model.
4. Consider the following Heckscher-Ohlin model: there are two countries, America and China, two goods, high-tech manufactures and low-tech manufactures, and two factors of production, skilled labor and unskilled labor. America is skilled-labor abundant and China is unskilled-labor abundant. High-tech manufactures are skilled-labor intensive and low-tech manufactures are unskilled-labor intensive. What happens to the price of high-tech manufactures relative to the price of low-tech manufactures in America following trade?
Draw the graph carefully. Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.
Consider the following data on the factor endowments of two countries A and B:
|
Countries |
||
|
Factor Endowments |
A |
B |
|
Labor force: L |
100 workers |
50 workers |
|
Capital Stock: K |
60 machines |
10 machines |
a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).
b. Supposing that cars are capital intensive relative to shoes, which country will have a comparative advantage in the production of cars? Of shoes? Explain.
c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.
d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.
