Economics 1021A/B Study Guide - Quiz Guide: Factor Endowment, Real Income, Perfect Competition

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ECON 1021A/B Full Course Notes

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A (cid:862)2 (cid:271)y 2 (cid:271)y 2(cid:863) (cid:373)odel, t(cid:449)o (cid:272)ou(cid:374)tries (cid:894)ho(cid:373)e a(cid:374)d foreig(cid:374)(cid:895), t(cid:449)o produ(cid:272)ts (cid:894)(cid:272)ars a(cid:374)d food(cid:895), and two factors of production (capital and labor). The heckscher-ohlin model focuses on differences in resources endowments, assuming countries are equal in all respects (production technology, consumer preferences). K*/l*) abundance is always measured in relative terms. Assumption: l/k and l*/k* are not too big or too small: both countries produce both goods. Initially rd and rs in each country determine how much of each good is produced and at which prices. Foreig(cid:374)"s food is relati(cid:448)ely (cid:272)heap for ho(cid:373)e (cid:272)o(cid:374)su(cid:373)ers. Ho(cid:373)e"s (cid:272)ars are relati(cid:448)ely (cid:272)heap for foreig(cid:374) consumers. In ea(cid:272)h (cid:272)ountry, the relative pri(cid:272)e of that good rises, that uses a (cid:272)ountry"s a(cid:271)undant factor intensively. As a result: home increases its relative supply of cars and exports some of its cars to foreign, foreign increases its relative supply of food and exports some of its food to home.

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1. The Heckscher Ohlin model Home and Foreign have twoproduction factors, skilled and unskilled labor and produce twogoods, textiles and computers. Home is skilled labor abundant,and computers are skilled labor intensive. Starting from asituation of autarky, the two countries liberalize trade. Assumingthat the two countries produce both goods before and after tradeliberalization, answer the following questions:

(a) What is the effect of trade liberalization on the relativeprice of com- puters at Home and in Foreign?
(b) What is the effect of trade liberalization on the output ofcomputers and textiles at Home and in Foreign?
(c) What is the effect of trade liberalization on aggregatewelfare in the two countries?
(d) What is the effect of trade liberalization on the realfactor returns in Home and Foreign? Please provide a graphicalexplanation for your argument. What is the name of this famousresult?

2. The Heckscher-Ohlin model Recently, computer programmers indevel- oping countries like India have begun doing some workformerly done in the United States. This shift has undoubtedly ledto substantial pay cuts for some programmers in the United States.Answer the following two questions:

(a) How is it possible, when the wages of skilled labor arerising in the United States as a whole?
(b) What argument would trade economists make against seeingthese wage cuts as a reason to block outsourcing of computerprogramming?

3. The Heckscher-Ohlin model This question asks you to reviewsome of the empirical tests of the Heckscher-Ohlin model.

(a) Explain how the Leontief Paradox and the more recent resultsby Bowen, Leamer and Sweikauskas discussed in class and in thetextbook contradict the predictions of the Heckscher Ohlinmodel.

(b) In the discussion of empirical results on the HeckscherOhlin model, we noted that recent work suggests that the efficiencyof production factors differ across countries. Explain how thiswould affect the concept of factor price equalization.

bluelion33

18. In the Heckscher-Ohlin model, when two countries begin to trade with each other

a. the relative prices of traded goods in the two countries converge.

b. the relative factor prices in the two countries diverge.

c. all factors in both countries will gain from trade.

d. all factors in one country will gain, but there may be no gains in the other country.

e. benefits from trade are evenly distributed between the two countries.

19. In the Heckscher-Ohlin model, when there is an international-trade equilibrium

a. the workers in the capital-abundant country will earn less than those in the capital-scarce country.

b. the capital-abundant country will charge less for the capital intensive good than the price paid by the capital-scarce country for the capital-intensive good.

c. the capital-abundant country will charge more for the capital intensive good than the price paid by the capital-scarce country for the capital-intensive good.

d. the workers in the capital-abundant country will earn more than those in the poor country.

e. the relative price of the capital intensive good in the capital-abundant country will be the same as that in the capital-scarce country.

pucesnail109

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?

(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?

pearfrog157

Economics 1021A/B Study Guide - Quiz Guide: Factor Endowment, Real Income, Perfect Competition

ECON 1021A/B Full Course Notes

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