TestBanks Chapter 04: Trade and Resources: The Heckscher­Ohlin
Model
1
Which of the following statements is TRUE?
The Heckscher­Ohlin model offers a reasonable
explanation of the pattern of trade and the gains from
trade.
The Heckscher­Ohlin trade model does not offer an
explanation of the pattern of trade.
The Heckscher­Ohlin trade model does not offer an
explanation of the gains from trade.
The Riparian trade model (with labor as the only input)
offers a better explanation of the pattern of trade and the
gains from trade than the Heckscher­Ohlin model.
2
A long­run model of trade basic to the determination of how
mobile factors of production affect national welfare and the
returns to the factors is known as:
the specific­factors model.
the Riparian model.
the Chicago model of trade.
the Heckscher­Ohlin model.
3
The Heckscher­Ohlin model of international trade uses
_____ and ______ to explain trade patterns.
comparative; absolute advantage
factor abundance; factor intensity
factor availability; factor usability
tariffs; quotas
4
The Heckscher­Ohlin theorem explains patterns of trade
between countries using:
economies of scale.
monopoly power in the industry.
abundance or scarcity of resources.
tariffs and quota.
5
The Heckscher­Ohlin model simplifies the analysis by
assuming:
there is unemployment of workers in the home country.
there are a variety of levels of workers and types of
capital.
land is an important factor of production.
there are only two nations, with two goods and two
factors of production.
6
Which of the following statements is CORRECT?
The HO model assumes that all resources can freely
move between industries.
The specific­factors model assumes that all resources
can freely move between industries.
Both the HO and the specific­factor models assume that
all resources can freely move between industries.
Neither the HO nor the specific­factor model assumes
that all resources can freely move between industries.
7
The Heckscher­Ohlin model assumes that factors of
production can move freely _______, but cannot move
_______.
domestically; internationally
after they are fully trained; before the training period is
over
internationally; domestically
within unskilled occupations; into high­skill jobs
8
The implication of resources being mobile domestically is
that:
there is often unemployment.
capital and land are often not suited for use in other
industries.
labor and capital are paid the same wage and rental
price in all domestic industries.
they lose the chance to become guest workers in other
nations.
9
The Heckscher­Ohlin model assumes that the factors of
production are mobile ______, but immobile _____.
in the short run; in the long run
in the long run; in the short run
domestically; internationally
internationally; domestically
10
In a capital­intensive industry, the labor/capital ratio will:
rise as the wage/rental ratio falls.
fall as the wage/rental ratio falls.
rise as the country's capital stock rises.
fall as the country's capital stock falls.
11
The Heckscher­Ohlin model assumes that production
techniques within a nation use the factors of production:
at different intensities depending on changing
technology and which nation you are discussing.
at different intensities for each industry, so that one is
more or less intensive in that factor than the other.
at the same intensity for each industry—for example,
the ratio of capital to labor is the same for every industry in
the nation.
in no definite pattern.
12
In the text, which of the following statements is NOT an
assumption of the Heckscher­Ohlin model?
There are two countries, each of which produces two
goods using labor and capital.
Labor and capital can move freely between the
production of two goods.
There is free trade between the countries.
Labor and capital can move freely between the two
countries.
13
The Heckscher­Ohlin model assumes that there are two
countries, each of which produces two goods (say
manufactures and agriculture) using labor and capital.
Which of the following is an additional assumption of the
Heckscher­Ohlin model?
The ratio of the quantity of labor to the quantity of
capital is different for each nation, resulting in different
“endowments” of capital and labor.
One nation has larger quantities of both capital and
labor than the other country.
Capital is a specific resource in producing manufactured
goods, and labor is a specific resource in producing
agricultural goods in each country.
Labor and capital can move between countries.
14
The Heckscher­Ohlin model assumes that technology in
each industry:
Is the same in each nation—each firm has access to the
most profitable technology.
has increasing returns so that one nation will be able to
gain a comparative advantage by developing new
technology.
is very different across the world—some nations have
access to technology, whereas others do not.
is hard to access because R&D is very expensive
especially for low­income nations.
15
The Heckscher­Ohlin Model assumes that:
factor endowments are the same.
consumer tastes are different across countries.
the technologies used to produce the two goods are
different across the countries.
consumer tastes and technologies are the same across
countries.
16
It may be unrealistic to assume that consumer tastes are
the same across nations and invariant with respect to
income:
so it is not one of the HO assumptions.
but it is an HO assumption because it enables the
analysis to focus on other issues that drive trade and
prices.
but it actually is true so it is an HO assumption.
and it is not an HO assumption because consumer tastes
within a nation are not relevant to international trade.
17
According to the application in the text, why can Nike shoes
be produced at low cost in foreign countries?
Foreign countries have superior technology.
Foreign countries are strategic allies for the home
country.
Labor costs in foreign countries are lower than in the
United States.
Nike has no competition in the foreign country.
18
United States' agricultural production is ________ in
comparison with Chinese agricultural production.
capital intensive
labor intensive
less subsidized
more restrictive
19
A situation in which one nation produces good A using labor
more intensively (relative to capital) than good B and a
second nation, producing good A, uses capital more
intensively (relative to labor) than good B is called:
a reversal of factor intensities.
a paradox of factor intensities
backward technology.
micro intensity.
20
Suppose that country 1 is capital abundant relative to
country 2. Both produce two goods (X and Y). Factor­
intensity reversal occurs whenever:
X is capital intensive in country 1 and labor intensive in
country 2.
X is capital intensive in both countries.
Y is capital intensive in both countries.
X is capital intensive in country 1, and Y is labor
intensive in country 2.
21
If agriculture is a capital­intensive industry in the United
States and a labor­intensive industry in India, then:
India should export agricultural goods to the United
States.
neither country will have an advantage in agricultural
production.
there is factor­intensity reversal in agricultural
production between the two countries.
it is difficult to determine which country is labor
abundant.
22
There are many real­life examples of factor­intensity
differences across the same industries in different nations.
How does the Heckscher­Ohlin model handle this?
The HO model makes no assumptions about different
factor intensities.
The HO model assumes that all firms require equal
amounts of capital and labor just to be on the safe side.
The HO model ignores the possibility of different factor
intensities and instead assumes that each industry has the
same factor intensity in every nation. This assumption
enables the model to predict trade based on other factors.
Actually, the factor­intensity reversal issue does not
change the predictive value of the model.
23
Why is the PPF bowed out in the Heckscher­Ohlin model?
Capital is specific to the production of one good.
Labor is specific to the production of the other good.
There are increasing opportunity costs of producing each
good.
Labor is not perfectly mobile between the production of
the two goods.
24
According to the text, identical technologies are a more
reasonable assumption for:
the shoe industry.
the call center industry.
neither the shoe nor call center industry.
both the shoe and call center industries.
25
The PPF of a country will be skewed toward the good that:
uses its scarce factor intensively.
uses its abundant factor intensively.
uses its intensive factor abundantly.
does not use its intensive factor abundantly.
26
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) Which line in
the graph represents the Home relative price of computers in
terms of shoes?
A
B
C
U
27
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) According to
the shapes of the two PPFs, which nation has a comparative
advantage in the production of computers?
Home
Foreign
neither Home nor Foreign
There is not enough information to answer this question.
28
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) According to
the graph, which nation has a higher no­trade equilibrium
relative price for computers (in terms of shoes)?
Home
Foreign
neither Home nor Foreign
There is not enough information to answer this question.
29
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) Which line in
the graph represents Foreign's relative price of computers in
terms of shoes?
A*
B*
C*
U*
30
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) At which point
will Home find its no­trade equilibrium consumption and
production point?
A
B
C
U
31
Figure: Home and Foreign Autarky Equilibria
Reference: Ref 4­1
(Figure: Home and Foreign Autarky Equilibria) If shoes are a
labor­intensive industry, which nation has more labor
resources relative to its capital resources?
Home
Foreign
neither Home nor Foreign
There is not enough information to answer this question.
32
Most trading nations do not completely specialize.
Incomplete specialization is mainly due to:
decreasing opportunity costs.
increasing opportunity costs.
constant opportunity costs.
perfectly substitutable resources.
33
Wages generally:
are higher in labor­abundant countries than in capital­
abundant countries.
are lower in labor­abundant countries than in capital­
abundant countries.
are the same in both labor­abundant and capital­
abundant countries.
have no relationship to labor abundance.
34
The international equilibrium price (or world price) and
quantity for a traded item is determined by:
the WTO.
the U.S. Department of Commerce.
the intersection of the export supply schedule and the
import demand schedule.
trade negotiations conducted by representatives in the
two nations.
35
Consider two products, automobiles and shoes. If shoes are
labor intensive and automobiles are capital intensive, what
can we expect in free­trade conditions?
The relative price of automobiles in the auto­exporting
country will decrease.
The relative price of shoes in the shoe­exporting country
will increase.
The capital­abundant country will produce more shoes.
The labor­abundant country will produce more
automobiles.
36
Suppose that the United States and China each produce
steel and cloth. In the Heckscher­Ohlin model, if the United
States enjoys a comparative advantage in steel production,
then:
China must have an absolute advantage in cloth
production.
the United States will also have a comparative
advantage in cloth production.
China must have a comparative advantage in cloth
production.
the United States must have an absolute advantage in
steel production.
37
LCD TVs are capital intensive, and tennis rackets are labor
intensive. Suppose Canada has $100 billion of capital and 2
million workers and Mexico has $10 billion of capital and 20
million workers. According to the HO model:
Canada will specialize in and export LCD TVs.
Mexico will specialize in and export LCD TVs.
Canada will specialize in and export tennis rackets.
Mexico will import tennis rackets.
38
Malaysia is relatively abundant in labor, whereas Canada is
relatively abundant in capital. In both countries, shirt
production is relatively more labor intensive than computer
production. According to the Heckscher­Ohlin model,
Malaysia will have a(n) ________ advantage in the
production of __________.
absolute; shirts and computers
absolute; computers
comparative; shirts
comparative; computers
39
Table: Capital Intensity Across Industries
U.S. Capital/Labor Ratios in Selected
Industries
Industry
Apparel and other textile
products
K/L
($/worker)
$8,274
Leather and leather products
$12,466
Furniture
$21,736
Lumber and wood products
$39,134
Textile mill products
$44,060
Electronic and electric
equipment
$54,582
Primary metal industries
$123,594
Paper and allied products
$171,730
Chemicals and allied products
$192,593
Reference: Ref 4­2
(Table: Capital Intensity Across Industries) According to the
table, which industry is the MOST labor intensive?
Apparel and other textile products
Lumber and wood products
Primary metal industries
Chemicals and allied products
40
Table: Capital Intensity Across Industries
U.S. Capital/Labor Ratios in Selected
Industries
Industry
Apparel and other textile
products
K/L
($/worker)
$8,274
Leather and leather products
$12,466
Furniture
$21,736
Lumber and wood products
$39,134
Textile mill products
$44,060
Electronic and electric
equipment
$54,582
Primary metal industries
$123,594
Paper and allied products
$171,730
Chemicals and allied products
$192,593
Reference: Ref 4­2
(Table: Capital Intensity Across Industries) Suppose that
the United States is labor abundant relative to Canada.
According to the table, which of the following U.S.
industry(ies) is (are) MOST likely to export products to
Canada?
Furniture
Electronic and electrical equipment
Primary metal industries
Paper and allied products
41
Table: Capital Intensity Across Industries
U.S. Capital/Labor Ratios in Selected
Industries
Industry
Apparel and other textile
products
K/L
($/worker)
$8,274
Leather and leather products
$12,466
Furniture
$21,736
Lumber and wood products
$39,134
Textile mill products
$44,060
Electronic and electric
equipment
$54,582
Primary metal industries
$123,594
Paper and allied products
$171,730
Chemicals and allied products
$192,593
Reference: Ref 4­2
If there are only two nations, one nation's exports are the
other's imports; which of the following is identical for both
nations?
only the equilibrium relative price of the first nation's
exports
only the opportunity cost of the first nation's exports
neither the equilibrium relative price nor the opportunity
cost of the first nation's exports
both the equilibrium relative price and the opportunity
cost of the first nation's exports
42
Suppose that Home is a capital­abundant country. When
Home trades with Foreign, a labor­abundant country, the
HO model predicts that the price of:
the labor­intensive good will rise in Home.
the labor­intensive good will rise in Foreign.
the capital­intensive good will rise in Foreign.
the capital­intensive good will fall in Home.
43
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) At
what point will this nation be in a no­trade equilibrium?
A
B
C
D
44
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) What
are the pretrade quantities of shoes and computers
produced by this nation?
300 shoes; 300 computers
225 shoes; 175 computers
225 shoes; 200 computers
150 shoes; 300 computers
45
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) What
is the equilibrium post­trade point of production of this
nation?
A
B
C
D
46
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) What
are the post­trade quantities of shoes and computers
produced by this nation?
300 shoes; 300 computers
225 shoes; 175 computers
225 shoes; 200 computers
150 shoes; 300 computers
47
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) What
happened to the relative price of shoes in this nation after
trade?
Shoes became relatively more expensive in terms of
computers.
Shoes became relatively cheaper in terms of computers.
Shoes were not as desirable after trade.
The price of shoes did not change—only the quantity.
48
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) The
trade triangle shows the exports that were exchanged for
imports. What are the three points of the trade triangle?
A, B, C
A, B, D
A, D, C
B, C, D
49
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) How
many shoes will this nation export?
0
125
350
500
50
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) How
many shoes will this nation import?
0
125
350
500
51
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) How
many computers will this nation export?
0
125
350
500
52
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) How
many computers will this nation import?
0
125
350
500
53
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria) If
the new international relative price of computers increases
from its pre­trade position, how will the slope of the price
line change in the graph?
The slope will increase.
The slope will decrease.
The slope will not change but the price line will shift to
the right.
The slope will not change but the price line will shift to
the left.
54
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria)
Suppose that the new international relative price of
computers increases from the pretrade price. If we then
subtract the number of computers purchased domestically
at the new international price from the number of
computers produced, we will get one point on
____________ for computers.
the import demand schedule
the export supply schedule
the production possibilities frontier
the indifference curve
55
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­3
(Figure: A Country's Before and After Trade Equilibria)
Suppose that the new international relative price of
computers increases from the pretrade price. If we then
subtract the number of shoes produced domestically at the
new international price from the number of shoes consumed
at this price, we will get one point on ____________ for
shoes.
the import demand schedule
the export supply schedule
the production possibilities frontier
the indifference curve
56
For which of the following does the Heckscher­Ohlin model
offer an explanation?
I. gains from trade
II. the pattern of trade.
III. the effects of international trade on the returns to
mobile resources.
I
I and II
I and III
I, II, and III
57
What is the conclusion of the Heckscher­Ohlin model?
In the real world, with unlimited goods, nations will buy
products that satisfy their demands and sell products they
have no use for.
If there are limited resources, such as capital and land,
production varies directly with the amount of labor used.
Some factors of production are fixed and some are
variable. We need only consider the variable factors when
we analyze international trade.
With two goods and two factors, each country will export
the good that uses intensively the factor of production it
has in abundance and will import the other good.
58
The conclusion that a labor­abundant country exports the
good using labor intensively in production and a capital­
abundant country exports the good using capital intensively
in production is known as:
factor­intensity reversal.
the Heckscher­Ohlin theorem.
Riparian comparative advantage.
the Stolper­Samuelson theorem.
59
Consider two products, automobiles and shoes. If shoes are
labor intensive and automobiles are capital intensive, what
will happen under the HO model?
The labor­abundant country will export automobiles.
The capital­abundant country will export shoes.
The labor­abundant country will import shoes.
The capital­abundant country will import shoes.
60
Suppose Portugal has 700 workers and 26,000 units of
capital, and France has 18,000 workers and 700 units of
capital. Technology is identical in both countries. Assume
that wine is the capital­intensive good and cloth is the
labor­intensive good. Which of the following statements is
CORRECT?
Portugal will export wine and import cloth.
France will export wine and import cloth.
There is no basis for trade between France and Portugal.
Portugal will export cloth and import wine.
61
Suppose Portugal has 700 workers and 26,000 units of
capital, and France has 18,000 workers and 700 units of
capital. Technology is identical in both countries. Assume
that wine is the capital­intensive good and cloth is the
labor­intensive good. Which of the following statements is
CORRECT if the nations start trading with each other?
Wages will increase in Portugal.
Rental rates in France will increase.
Wages in France will decrease.
Rental rates in Portugal will increase.
62
Table: Data on Suburbia
Use this table, which represents autarkic and free trade
production and consumption and resource usage for
Suburbia, to answer the following question(s).
Autarky Free­Trade
Production of good X
1,000 units
2,000 units
Consumption of good X
1,000 units
1,000 units
Capital used to produce
good X
1,000 units
2,000 units
Labor used to produce
good X
1,000 days
1,250 days
Production of good Y
1,000 units
500 units
Consumption of good Y
1,000 units
2,000 units
Capital used to produce
good Y
1,500 units
1,000 units
500 days
250 days
Labor used to produce
good Y
Reference: Ref 4­4
(Table: Data on Suburbia) Which of the following statement
is CORRECT?
Surburbia is a labor­intensive country.
Suburbia is a labor­abundant country.
Suburbia is a capital­intensive country.
Suburbia is a capital­abundant country.
63
Table: Data on Suburbia
Use this table, which represents autarkic and free trade
production and consumption and resource usage for
Suburbia, to answer the following question(s).
Autarky Free­Trade
Production of good X
1,000 units
2,000 units
Consumption of good X
1,000 units
1,000 units
Capital used to produce
good X
1,000 units
2,000 units
Labor used to produce
good X
1,000 days
1,250 days
Production of good Y
1,000 units
500 units
Consumption of good Y
1,000 units
2,000 units
Capital used to produce
good Y
1,500 units
1,000 units
500 days
250 days
Labor used to produce
good Y
Reference: Ref 4­4
(Table: Data on Suburbia) What is the ratio of total capital
to total labor in Suburbia?
1 unit/day
1.5 units/day
1.67 units/day
3 units/day
64
Table: Data on Suburbia
Use this table, which represents autarkic and free trade
production and consumption and resource usage for
Suburbia, to answer the following question(s).
Autarky Free­Trade
Production of good X
1,000 units
2,000 units
Consumption of good X
1,000 units
1,000 units
Capital used to produce
good X
1,000 units
2,000 units
Labor used to produce
good X
1,000 days
1,250 days
Production of good Y
1,000 units
500 units
Consumption of good Y
1,000 units
2,000 units
Capital used to produce
good Y
1,500 units
1,000 units
500 days
250 days
Labor used to produce
good Y
Reference: Ref 4­4
(Table: Data on Suburbia) How many units of which product
will Suburbia import?
2,000 units of X
1,000 units of X
2,000 units of Y
1,500 units of Y
65
Table: Data on Suburbia
Use this table, which represents autarkic and free trade
production and consumption and resource usage for
Suburbia, to answer the following question(s).
Autarky Free­Trade
Production of good X
1,000 units
2,000 units
Consumption of good X
1,000 units
1,000 units
Capital used to produce
good X
1,000 units
2,000 units
Labor used to produce
good X
1,000 days
1,250 days
Production of good Y
1,000 units
500 units
Consumption of good Y
1,000 units
2,000 units
Capital used to produce
good Y
1,500 units
1,000 units
500 days
250 days
Labor used to produce
good Y
Reference: Ref 4­4
(Table: Data on Suburbia) Did the capital­labor ratio used
in the production of good X rise, fall, or remain unchanged
as Suburbia moved from autarky to free trade?
It rose.
It fell.
It remained the same.
There is not enough information given in the table to
answer this question.
66
Table: Data on Suburbia
Use this table, which represents autarkic and free trade
production and consumption and resource usage for
Suburbia, to answer the following question(s).
Autarky Free­Trade
Production of good X
1,000 units
2,000 units
Consumption of good X
1,000 units
1,000 units
Capital used to produce
good X
1,000 units
2,000 units
Labor used to produce
good X
1,000 days
1,250 days
Production of good Y
1,000 units
500 units
Consumption of good Y
1,000 units
2,000 units
Capital used to produce
good Y
1,500 units
1,000 units
500 days
250 days
Labor used to produce
good Y
Reference: Ref 4­4
(Table: Data on Suburbia) Which of the following
statements is TRUE regarding the change in the marginal
product of labor as Suburbia moved from autarky to a free­
trade situation?
The MPL in good X production rose.
The MPL in good Y production fell.
The MPL in good X and good Y production both rose
The MPL in good X and good Y production both fell.
67
Leontief suggested that his results were not a paradox once
we account for differences in:
resource endowments.
capital stocks.
labor forces.
resource productivities.
68
Table: Factor Use in Trade
Exports
Capital ($ million)
$3.55
Labor (person­years)
192
Capital/Labor
($/person)
Imports
$5
160
Reference: Ref 4­5
(Table: Factor Use in Trade) In the hypothetical economy
provided in the table, what is the capital­to­labor ratio for
imports?
$31,250
$21,500
$1,600
$3,125
69
In his test of the HO model for the United States, Leontief
found that :
the United States was importing labor­intensive
commodities.
the U.S. capital/labor ratio for imported goods was
larger than that for the exported goods.
the U.S. capital/labor ratio for imported goods was
smaller than that for the exported goods.
there was a trade imbalance in the United States.
70
Economist Wassily Leontief tested the Heckscher­Ohlin
model to determine whether it correctly predicted the
capital and labor content of imports and exports of:
Russia.
China.
the United States.
Belgium.
71
Table: Factor Use in Trade
Exports
Capital ($ million)
$3.55
Labor (person­years)
192
Capital/Labor
($/person)
Imports
$5
160
Reference: Ref 4­5
(Table: Factor Use in Trade) In the hypothetical economy
provided in the table, what is the capital­to­labor ratio for
exports?
$1,849
$35,500
$18,490
$1,920
72
The Leontief paradox found that:
exports should always be capital intensive.
imports should always be labor intensive.
U.S. exports were labor intensive.
U.S. exports were capital intensive.
73
Leontief discovered a “paradox” in his test of the HO­model
for the United States. He expected the United States to
export _____­intensive goods and import _____­ intensive
goods; but his study indicated the reverse was TRUE.
land; technology
labor; land
capital; labor
labor; capital
74
Which of the following statements is NOT an explanation of
Leontief's paradox?
Leontief ignored the fact that the United States imports
a variety of products rather than just one.
He ignored the fact that U.S. labor is highly skilled.
He ignored the importance of land as a factor in many
U.S. exports.
Trade patterns in 1947 might have been affected by the
fact that World War II had ended only two years earlier.
75
Leontief found that:
U.S. trade increased after World War II.
U.S. exports were capital intensive compared with its
import­competing production.
U.S. exports were labor intensive compared with its
import­competing production.
U.S. exports were neither capital nor labor intensive.
76
The Leontief paradox questioned the validity of:
the
the
the
the
77
comparative advantage model.
Heckscher­Ohlin model.
Riparian model.
specific­factors model.
Leontief's study of U.S. post­World War II trade concluded
that the:
United States
United States
HO model did
United States.
United States
78
did not gain from trade.
exported labor­intensive goods
not explain trade between Europe and the
exported capital­intensive goods.
What was “paradoxical” about Leontief's test of the HO
model on U.S. trade?
Leontief concluded that U.S.
intensive than U.S. exports.
Leontief concluded that U.S.
intensive than U.S. exports.
Leontief concluded that U.S.
agricultural products.
Leontief concluded that U.S.
internationally competitive.
79
imports were more labor
imports were more capital
imports were primarily
exports were not
Which of the following offers an explanation for the Leontief
paradox?
I. Leontief's assumption that U.S. and foreign
technologies are the same is incorrect.
II. Leontief did not incorporate land and other resources.
III. Leontief did not distinguish between skilled and
unskilled labor.
I, II, and III
I and II
I and III
I
80
Which of the following is NOT an explanation of Leontief's
paradox?
Leontief did not distinguish between high­skilled and
low­skilled labor.
The United States was not engaged in completely free
trade in 1947 as the HO assumes.
The data from 1947 might be unusual because the war
had recently ended.
United States' trading partners gave preferential
treatment to US exports.
81
Which of the following countries has the MOST physical
capital?
the United States
China
Japan
India
82
Which of the following countries had the MOST R&D
scientists in 2010?
the United States
China
Japan
India
83
Which of the following countries had the MOST illiterate
labor in 2010?
the United States
China
Japan
India
84
Compared with the rest of the world in 2010, the United
States was MOST abundant in:
capital.
skilled labor.
less­skilled labor.
arable land.
85
Compared with the rest of the world in 2010, the United
States is LEAST abundant in:
capital.
skilled labor.
unskilled labor.
illiterate labor.
86
To determine whether a nation has an “abundance” of a
resource, economists look at:
the exports of the nation.
the imports of the nation.
the total quantity of that resource compared with the
total quantity of the other resource.
a nation's share of the resource compared with its share
of world GDP.
87
A problem with measuring the factor shares to determine
scarcity or abundance is that:
it is very hard to count workers in some nations.
estimates are very unreliable.
the quantity of a factor may not be as important as its
productivity.
scientists disagree over the method by which to
compute “share.”
88
A country's effective factor endowment is defined as its:
actual factor endowment times factor productivity.
actual factor endowment times GDP.
effective factor endowment times factor productivity.
actual factor endowment divided by its factor
productivity.
89
If we measure scarcity or abundance correctly, we should
use the concept of “effective factor endowment.” This
means:
the actual factor endowment multiplied by the average
productivity of workers compared with its share of world
GDP.
trying to find out how much labor and capital are really
involved in producing goods competing with imports and
exports.
measuring more effectively a nation's actual factor
endowment.
the actual factor endowment of labor multiplied by the
productivity of capital, because, effectively, the productivity
of one depends on the quantity of the other.
90
Compared with other countries, the United States' effective
factor endowment is greatest for:
capital.
R&D scientists.
arable land.
unskilled labor.
91
According to the text, which of the following statements
BEST describes U.S. factor abundance in 1947?
Taking into account different labor productivities, the
U.S. “effective” labor force was much larger than the
“effective” labor force in the rest of the world.
Taking into account different labor productivities, the
U.S. '”effective” labor force was much smaller than the
“effective” labor force in the rest of the world.
Taking into account productivities of capital in different
industries, the U.S. “effective” capital stock was much
smaller than the '”effective” capital stock force in the rest of
the world.
Corrected data indicate that the United States was
actually was a labor­abundant and capital­poor country in
1947.
92
Suppose that Home has 20% of the world's capital, 10% of
the world's skilled labor, and 30% of the world's unskilled
labor and produces 20% of the world's GDP. What does this
information suggest?
only that Home is capital abundant
only that Home is skilled­labor abundant
only that Home is abundant in unskilled labor
Home is not abundant in capital, skilled labor, or
unskilled labor.
93
After accounting for differing _________ as well as
_________, evidence for many countries is broadly
consistent with the Heckscher­Ohlin model.
factor productivities; factor endowments
preferences; factor productivities
preferences; factor endowments
factor endowments; generalities
94
Assume that Home is relatively abundant in labor and
relatively scarce in land. The Heckscher­Ohlin model
predicts that trade with other countries will cause increased
returns to:
Home's labor.
Home's land.
neither both Home's labor nor land.
both Home's labor and land.
95
If the wage­rental ratio in Japanese auto production is
lower than the wage­rental ratio in U.S. auto production,
then:
Japan must have a comparative advantage in the
production of autos.
Japan must have an absolute advantage in the
production of autos.
auto production costs must be lower in Japan than in the
United States.
auto production costs could be lower in the United
States if U.S. labor productivity is higher than Japanese
labor productivity.
96
In a capital­abundant country, free trade will cause a(n)
__________ in the rental of capital and a(n)
____________ in the marginal product of capital.
increase; increase
increase; decrease
decrease; decrease
decrease; increase
97
In a labor­abundant country, free trade will cause a(n)
__________ in the rental of capital and a(n) _________ in
the marginal product of capital.
increase; increase
increase; decrease
decrease; decrease
decrease; increase
98
The wage paid to labor should increase when:
the capital/labor ratio increases.
the capital/labor ratio decreases.
a country's labor force increases.
a country's capital stock decreases.
99
100
With the “opening” of trade, the item exported experiences
a(n) ________ in demand and therefore a(n) ________ in
its relative (domestic) price, whereas the item imported
experiences a(n) ________ in demand and therefore a(n)
________ in its relative (domestic) price.
increase, increase; decrease, decrease
increase, decrease; increase, decrease
decrease, decrease; increase, increase
decrease, increase; decrease, increase
The HO model predicts that the factor of production used
more intensively in the production of exports will
experience:
decreased demand and a decline in its relative price.
decreased demand and an increase in its relative price.
increased demand and an increase in its relative price.
no change in its demand because the factors of
production are fixed in the short run.
101
As trade occurs, increased imports will force domestic
import­competing firms to decrease price and production.
Labor and capital will move to exporting firms. What will
then happen to wages and returns to capital?
Both wages and returns to capital will increase.
Both wages and returns to capital will decrease.
Wages will increase and returns to capital will decrease.
Wages will decrease and returns to capital will increase.
102
SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
produces wine and bread; (3) The production of bread is
relatively capital intensive, and the production of wine is
relatively labor intensive, and (4) France is relatively
abundant in capital, while Italy is relatively abundant in
labor.
Reference: Ref 4­6
(Scenario: France and Italy) Which of the following
statements is CORRECT?
Italy has a larger labor force than France.
France has a larger labor force than Italy.
The ratio of Italy's total capital stock to its labor force is
smaller than the same ratio for France.
The ratio of Italy's total capital stock to its labor force is
larger than the same ratio for France.
103
SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
produces wine and bread; (3) The production of bread is
relatively capital intensive, and the production of wine is
relatively labor intensive, and (4) France is relatively
abundant in capital, while Italy is relatively abundant in
labor.
Reference: Ref 4­6
(Scenario: France and Italy) According to the HO model,
what product(s) will Italy export?
bread
wine
neither bread nor wine
both bread and wine
104
SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
produces wine and bread; (3) The production of bread is
relatively capital intensive, and the production of wine is
relatively labor intensive, and (4) France is relatively
abundant in capital, while Italy is relatively abundant in
labor.
Reference: Ref 4­6
(Scenario: France and Italy) According to the HO model,
free trade between Italy and France should cause:
a decrease in the French price of wine and a decrease
in the Italian price of wine.
increases in the price of wine in Italy and in France.
an increase in the French price of wine and an increase
in the Italian price of bread.
a decrease in the Italian price of bread and a decrease
in the French price of wine.
105
SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
produces wine and bread; (3) The production of bread is
relatively capital intensive, and the production of wine is
relatively labor intensive, and (4) France is relatively
abundant in capital, while Italy is relatively abundant in
labor.
Reference: Ref 4­6
(Scenario: France and Italy) According to the HO model,
free trade between France and Italy should result in
increased wages in both countries
decreased wages in both countries.
increased wages in France and increased returns to
capital in Italy.
increased returns to capital in France and increased
wages in Italy.
106
According to the Heckscher­Ohlin model, international
trade for a nation with a relative abundance of skilled labor
and a relative scarcity of unskilled labor will tend to:
widen or aggravate the income disparity between
skilled and unskilled workers.
reduce the income disparity between skilled and
unskilled workers.
lower the wages of both groups of workers.
raise the wages of both groups of workers.
107
SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and
chemicals using labor and capital as the only inputs in
production. The United States is capital abundant, and
Canada is labor abundant. Computer production is more
labor intensive than chemical production in both countries.
Reference: Ref 4­7
(Scenario: Canada and the United States) What does the
Heckscher­Ohlin model predict will happen to wages and
returns to capital after trade takes place between Canada
and the United States?
Wages of Canadian workers should rise.
Returns to capital in Canada should rise.
Wages of U.S. workers should rise.
Returns to capital in the United States should fall.
108
SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and
chemicals using labor and capital as the only inputs in
production. The United States is capital abundant, and
Canada is labor abundant. Computer production is more
labor intensive than chemical production in both countries.
Reference: Ref 4­7
(Scenario: Canada and the United States) What does the
Heckscher­Ohlin model predict will happen to prices of
computers or chemicals in the two countries?
The price of chemicals should rise in the United States.
The price of chemicals should fall in the United States.
The price of computers should fall in Canada.
The price of chemicals should rise in Canada.
109
SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to
produce wheat and automobiles. The United States is
capital abundant, and Chile is labor abundant. Wheat
production is more labor intensive than automobile
production.
Reference: Ref 4­8
(Scenario: Chile and the United States) According to the
Heckscher­Ohlin model:
Chilean workers should support U.S.­Chile free trade.
Chilean owners of capital should support U.S.­Chile free
trade.
U.S. owners of capital should oppose U.S.­Chile free
trade.
both U.S. and Chilean owners of capital should oppose
U.S.­Chile free trade.
110
SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to
produce wheat and automobiles. The United States is
capital abundant, and Chile is labor abundant. Wheat
production is more labor intensive than automobile
production.
Reference: Ref 4­8
(Scenario: Chile and the United States) What is the
MOSTimportant reason why U.S. workers might oppose
U.S.­Chile free trade?
Returns to capital in the United States are expected to
rise as a result of U.S.­Chile free trade.
Wages in the United States are expected to rise as a
result of U.S.­Chile free trade.
Returns to capital in Chile are expected to rise as a
result of U.S.­Chile free trade.
Wages in the United States are expected to fall as a
result of U.S.­Chile free trade.
111
Which statement BEST describes the Heckscher­Ohlin
model?
It only offers an explanation of the gains from
international trade.
It only offers an explanation of the pattern of
international trade.
It only offers an explanation of the effects of
international trade on returns to mobile resources.
It offers an explanation of the gains, the pattern of
international trade, and the effects of international trade
on returns to mobile resources.
112
What does the HO model predict will happen to the real
returns to factors of production after trade occurs?
Labor and capital must be used together in production,
and there is no room for competition for remuneration.
Capital owners always get the “gains from trade.”
Resources used intensively in export industries (such as
labor in China and capital in the United States) will see an
increase in their returns, whereas the resources used
intensively in import­competing industries will see a
decline in their return.
Poor nations will always get the least returns to their
factors of production.
113
If Home is capital abundant, then when it begins to freely
trade with the rest of the world, the return to capital in
Home should _________ and the real wage in Home
should _______.
fall; rise
fall; fall
rise; rise
rise; fall
114
In the long run, when factors are mobile, an increase in
the relative price of a good will increase the real earnings
of the factor used intensively in the production of that
good. This is known as:
the Heckscher­Ohlin model.
the Stolper­Samuelson theorem.
the Riparian model.
the specific­factor theorem.
115
The conclusion that international trade will lead to an
increase in real earnings of a country's abundant resource
is known as:
factor­intensity reversal.
the Heckscher­Ohlin model.
Riparian comparative advantage.
the Stolper­Samuelson theorem.
116
The Stolper­Samuelson theorem suggests that, over time,
free international trade should lead to:
equalization of real wages across the world.
greater divergences in real wages across the world.
equalization of prices across the world.
greater divergences in prices across the world.
117
If a country finds its comparative advantage in computer
production, which is capital intensive, what will happen to
the rental rate on capital when trade occurs?
It will decrease.
It will stay the same.
It will increase.
Not enough information is given to answer this
question.
118
Suppose that, with trade, the price of shoes (which are
labor intensive) increases by 10%. Then which of the
following can you say for sure about returns to labor and
capital in the country?
Wages will rise by more than 10%.
Rental rates will rise by more than 10%.
Wages will rise by no more than 10%.
Rental rates will fall by at least 10%.
119
Feenstra and Taylor describe the “magnification effect” of
trade. This effect describes how:
workers tend to complain more about trade than is
justified.
owners of capital can “magnify” their earnings if they
are able to trade.
small changes in relative prices as a result of trade lead
to larger long­run changes in the real wage or rental of
factors.
unemployment is a big problem among workers but not
capital because workers have to move when they are laid
off.
120
Suppose that all countries eliminate their barriers to trade.
The Heckscher­Ohlin model predicts that:
wages should become more equal throughout the
world.
wages should become more unequal throughout the
world.
the volume of international trade should fall.
there should be increased migration of labor among
countries.
121
Surveys have found that ____________ are the strongest
proponents of placing limits on imports.
unskilled workers
farmers
skilled workers
college professors
122
Which of the following groups is MOST likely to favor free
trade for the United States?
unskilled workers
barbers
more educated workers
None of these is likely to favor free trade.
123
Which of the following groups will NOT gain if China and
the United States engage in completely free trade?
U.S.
U.S.
U.S.
U.S.
124
unskilled labor
consumers of Chinese made products
skilled labor
owners of capital
The Heckscher­Ohlin model offers an explanation of:
only the gains from international trade.
only the pattern of international trade.
only the effects of international trade on returns to
mobile resources.
gains from international trade, the pattern of
international trade,and the effects of international trade on
returns to mobile resources.
125
Table: Factor Use in Latvian Trade
Factor Contents of Latvia's Trade
Dollars of capital per million
dollars of:
Years of labor per million
dollars of:
Import
Substitutes
Exports
$4,000
$3,000
2,000
3,000
Reference: Ref 4­9
(Table: Factor Use in Latvian Trade) Does Latvia import capital­
or labor­intensive products?
capital intensive
labor intensive
neither capital nor labor intensive
both capital and labor intensive
126
Table: Factor Use in Latvian Trade
Factor Contents of Latvia's Trade
Dollars of capital per million
dollars of:
Years of labor per million
dollars of:
Import
Substitutes
Exports
$4,000
$3,000
2,000
3,000
Reference: Ref 4­9
(Table: Factor Use in Latvian Trade) According to the
Heckscher­Ohlin model, Latvia's capital/labor ratios are
consistent with:
Latvia being a capital­abundant country.
Latvia being a labor­abundant country.
Latvia being neither a capital­ nor labor­abundant country.
Latvia being both a labor­ and capital­abundant country.
127
The following table represents autarkic and free trade
production and consumption and resource usage for
Suburbia.
Autarky Free­Trade
Production of good X
100 units
200 units
Consumption of good X
100 units
100 units
Capital used to produce
100 units
200 units
good X
Labor used to produce
100 days
125 days
good X
Production of good Y
100 units
50 units
Consumption of good Y
100 units
200 units
Capital used to produce
150 units
100 units
good Y
Labor used to produce
50 days
25 days
good Y
A) Is Surburbia a labor­ or a capital­abundant country?
Explain your answer.
B) What is the price of good X in autarky? With free trade?
C) How many units of what product are exported? How
many units of what product are imported?
D) Has the marginal product of labor in good X production
increased or decreased?
Explain your answer.
E) Has the marginal product of capital in good Y production
increased or decreased?
Explain your answer.
Answer:
A) Surburbia is a labor­abundant country since its export
product (X) is labor intensive.
B) The price of good X is 1Y = 1X since it produces and
consumes 100X and 150Y in autarky.
C) 100 units of good X are exported since 200 units are
produced and 100 are consumed; 150 units of good Y are
imported since 50 are produced and 200 are consumed.
D) The MPL in good X has increased since the capital­
labor ratio in X production has risen from 1 unit/day to 200
units/125 day. Note the same is true in good Y production
since its capital­labor ratio also rose from 150 units/50
days to 100 units/25 days.
E) The MPK decreased in good Y production since 1 unit
E) The MPK decreased in good Y production since 1 unit
of capital now has fewer units of labor with which to work
(compare 3:1 with autarky to 4:1 with free trade).
128
Figure: A Country's Before and After Trade Equilibria
Reference: Ref 4­10
(Figure: A Country's Before and After Trade Equilibria)
Using the graph, how can you decide whether the nation
has “gained” from trade and has a higher standard of
living?
Answer:
Using all of its resources to produce both computers and
shoes allows this nation to get on indifference curve U1.
After trade, by exporting computers and importing shoes,
this nation is able to increase its standard of living and
move to the higher indifference curve, U2.
129
Suppose the information given in the following table is for
a country with abundant labor. Does this information
indicate that the country's trade pattern violates the HO
model?
Exports
Imports
Capital ($ million) $3.55
$5
Labor (person­
192
160
years)
Capital/Labor
($/person)
Answer:
No; the factor content of its exports ($18,490 of capital
per person­year of labor) is less than the factor content of
its import­competing production ($31,250 of capital per
person­year of labor). It is a labor­abundant country and is
exporting labor­intensive products, which is consistent with
the HO model.
130
A) Is the United States a net exporter or importer of
agricultural products?
B) Consider an HO model with arable land as one of the
two resources. Are the model's predictions consistent with
the data presented in the text?
Answer:
A) It is a net exporter of agricultural products.
B) Since the United States is a net agricultural exporter, it
should be abundant in arable land relative to the countries
to which it exports agricultural products, that is, its
aggregate ratio of arable land to the other resource (e.g.,
labor) should be higher than the same ratio in countries
that import U.S. agricultural imports. However, the data
indicate that the United States was scarce in arable land
(11.8% of the world's total as compared with 19.1% of the
world's GDP). The model and the data are not consistent,
since the United States is a major exporter of agricultural
commodities.
131
Why is the specific­factors model referred to as a “short­
run” version of the Heckscher­Ohlin model?
Answer:
If no factors are specific, then the predictions of the
specific­factors model are the same as those of the
Heckscher­Ohlin model. Thus, if we allow all factors to
move, as occurs in the long run when it is possible to
reassign raw materials, retrain labor, or refit machines,
then the specific­factors model approaches the Heckscher­
Ohlin model. Because it is not always possible to make
these changes in the short run, the specific­factors model
can be thought of as a short­run version of Heckscher­
Ohlin.
132
Suppose that Home has 20% of the world's capital, 10% of
the world's skilled labor, 30% of the world's unskilled
labor, and produces 20% of the world's GDP. What does
this information suggest about Home's resource
endowments? Explain your answer.
Answer:
It suggests that Home is abundant in unskilled labor. Its
ratios of its shares of the world's resources to its share of
world GDP are: capital 20%/20% = 100%; skilled labor
10%/20% = 50%, and unskilled labor 30%/20% = 150%
indicate that it is relatively more abundant in unskilled
labor than to capital (100%) and to skilled labor (50%).
133
Suppose that the following table gives annual employee compensation
(including fringe benefits) in the United States, China, and India for various
industries. According to the HO model, which U.S. industries are MOST likely
to face the strongest competition from Indian imports? Explain your answer.
Table: Employee Compensation Across Industries in the United
States, Chile, and India
Industry
United States Chile
India
Apparel and clothing
$25,290
$16,200
$7,400
Chemical products
$70,242
$50,200
$20,700
Industrial machinery and
equipment
$53,452
$46,500
$26,600
Instruments and related
products
$59,268
$49,300
$39,700
Leather and leather products
$30,528
$20,600
$10,800
Textiles and textile products
$31,897
$24,000
$12,900
Answer:
Apparel and clothing, leather and leather products, textiles and textile
products are the most likely because the differences between US and Indian
employee compensation are largest in those industries.
134
According to the Stolper­Samuelson theorem, would you
expect U.S. skilled workers to benefit from free trade
worldwide?
Answer:
Yes; since the U.S. appears to be skilled labor abundant
and trade causes returns to a country's abundant factor to
increase (according to the Stolper­Samuelson theorem).
Freer trade should benefit U.S. skilled workers and harm
U.S. unskilled workers.
135
The United States and China, respectively, had 21.4% and
20.9% of the world's R&D scientists in 2010. Why then did
the United States have 24.1% of the world's “effective”
R&D scientists and China have 9.1% of the world's
“effective” R&D scientists in 2010?
Answer:
The reason is because the “effective” measure corrects for
the productivity of R&D scientists. It is the ratio of the
product of the number of R&D scientists multiplied by R&D
spending per scientist in a particular country to total world
R&D spending. In this case, the United States spends more
than the world average per scientist than China, thus
increasing the U.S. “effective” share and reducing China's
effective share.
136
One way to measure a country's labor endowment is to adjust its
share of the world's population using wages as a measure for
differences in labor productivity and then compare this adjusted
share to the country's share of world GDP.
Country A
World
A's share of
World
Population 100,000,000
3,000,000,000
GDP
$4 trillion
$30 trillion
Wages
$3 trillion
$20 trillion
Answer:
Use the hypothetical data in the following table to compute a
country's share of world GDP, its share of world population, and
its share of “effective” labor, as measured by wages.
Country A
World
A's share of
World
137
Population 100,000,000
3,000,000,000
3.33%
GDP
$4 trillion
$30 trillion
13.33%
Wages
$3 trillion
$20 trillion
15.00%
According to the Stolper­Samuelson theorem, would you
expect all workers across the globe to favor limiting trade?
Why or why not?
Answer:
No; the Stolper­Samuelson theorem indicates that wages
will fall in the labor­abundant country but rise in the
capital­abundant country when trade is limited. Thus, one
would not expect worldwide support for limiting trade.
138
If China has a comparative advantage in producing low­
skilled, labor­intensive goods, what should happen to
Chinese low­skilled workers' wages as trade barriers
against Chinese imports fall across the world? What should
happen to returns to capital in China?
Answer:
Wages of Chinese low­skilled workers should rise relative
to wages of similar workers in their trading partners.
Returns to capital should fall relative to returns to capital
in their trading partners. Note: Widely publicized reports of
wage increases in many Chinese firms during the summer
of 2010 corroborate this expectation.
139
In a labor­abundant nation, will workers be more or less
favorable to international trade? What about a capital­
abundant nation? Why?
Answer:
Workers will be more favorable to trade in a labor­
abundant nation because trade increases their real wage
and standard of living. In a capital­abundant nation,
workers would see a decline in their real wage and a
decrease in their purchasing power as a result of lower
wages and higher prices—thus, they would oppose trade.
140
Who is likely to lose if the United States imposed
restrictions on its imports from China?
Answer:
Losers include: consumers of Chinese­made goods;
workers and firms directly engaged in the production of
exports to China; and workers and firms supplying
material inputs used in the production of exports to China.
141
Who is likely to gain if the United States imposed
restrictions on its imports from China?
Answer:
Gainers include: consumers of Chinese­made goods;
workers and firms directly engaged in the production of
exports to China, and workers and firms supplying material
inputs used in the production of exports to China.
142
Consider the Heckscher­Ohlin theory and the Stolper­
Samuelson theorem. What do they suggest about what are
the gainers and the losers from International trade?
Answer:
The HO theory suggests that the import­competing sector
will shrink and the export sector will expand. The Stolper­
Samuelson theorem suggests that, as resources move
from the import­competing sector to the export sector,
returns to the country's abundant resource will increase
and returns to the country's scarce resource will decrease.
Hence, returns to capital will increase and returns to labor
will decrease in a capital­abundant country and vice­versa
in a labor­abundant country.