HOMEWORK 6 (HECKSCHER-OHLIN THEORY) ECO41 FALL 2015 UDAYAN ROY
Unless otherwise indicated, each correct answer is worth 1 point. The maximum score is 20 points.
This homework assignment is due on Wednesday, October 21. Please show your answers on the
answer sheet (on the last page).
Note: For all questions below, consider a world in which the assumptions of the Heckscher-Ohlin theory
are true. Suppose there are two countries, Australia (A) and Brazil (B), and two resources, capital (K)
and labor (L), that are used to produce two goods, cloth (C) and food (F).
1. The amounts of K and L that A and B are endowed with are given in the
adjoining table. Which of the following is true?
Resource Endowments
Capital (K)
a.
b.
c.
d.
e.
Labor (L)
Australia is capital abundant and Brazil is labor abundant
Australia 100 machines 50 workers
Australia is labor abundant and Brazil is capital abundant
Brazil
10 machines 20 workers
Australia is capital intensive and Brazil is labor intensive
Australia is labor intensive and Brazil is capital intensive
Australia has more of both resources. So, Australia is both capital abundant and labor abundant
2. Suppose that on a particular day you visit several
cloth factories in Australia. You find that they are
employing the amounts of resources shown in the
adjoining table. Which of the following is true?
a. Factory 1 must be paying either a lower price for
Resource Employment
Capital (K) Labor (L) Capital-Labor ratio (K/L)
machines workers machines per worker
Factory 1
10
5
2
10
20
0.5
capital or a higher price for labor than the other Factory 2
factories. That’s why it is using more capital per
Factory 3
40
40
1
worker than the other factories
b. Factory 1 must be using a technology that either makes better use of capital or worse use of
labor than the other factories. That is why it is using more capital per worker than the other
factories.
c. The data given here is impossible under Heckscher-Ohlin assumptions. In that theory, all firms
use the same technology. Moreover, as resource markets are assumed to be perfectly
competitive, it is impossible for different factories to be paying different prices for capital and
labor. As a result, under Heckscher-Ohlin assumptions, all firms in a country must employ capital
and labor in the same proportions
d. The use of capital and labor in different ratios in different cloth factories is perfectly consistent
with Heckscher-Ohlin assumptions
3. Suppose that on a particular day you visit several cloth factories in Australia and several food
factories, also in Australia. You find that all cloth factories are using 1 machine per worker and that
all food factories are using 3 machines per worker.
a. This means that cloth is the labor-intensive good and food is the capital-intensive good
b. This means that cloth is the capital-intensive good and food is the labor-intensive good
c. The technology used in production need not be the same in the two countries. Therefore,
although the capital-per-worker ratio is higher for food production in Australia, in Brazil it could
instead be higher for cloth production. So, you cannot tell which good is capital-intensive and
which good is labor-intensive by looking at just one country
d. Under Heckscher-Ohlin assumptions, both countries must have the same technology. So, if in
Australia the capital-labor ratio is higher in food production (compared to cloth production),
then the same must be true in Brazil as well. Therefore, cloth is labor intensive—and food is
capital intensive—in both Australia and Brazil.
e. Both (a) and (d) are correct
4. (2 points) The amounts of K and L that Australia and Brazil are
endowed with are given in the adjoining table.
Resource Endowments
Capital (K)
Suppose also that on a particular day you visit several cloth
factories in Australia and several food factories, also in Australia.
You find that all cloth factories are using 1 machine per worker
and that all food factories are using 3 machines per worker.
Labor (L)
Australia 100 machines 50 workers
Brazil
10 machines 20 workers
Then, according to the Heckscher-Ohlin theory, under free trade
a.
b.
c.
d.
e.
f.
g.
h.
Australia, the capital-abundant country, will export food, the capital-intensive good
Australia, the capital-abundant country, will export food, the labor-intensive good
Australia, the labor-abundant country, will export food, the capital-intensive good
Australia, the labor-abundant country, will export food, the labor-intensive good
Australia, the capital-abundant country, will export cloth, the capital-intensive good
Australia, the capital-abundant country, will export cloth, the labor-intensive good
Australia, the labor-abundant country, will export cloth, the capital-intensive good
Australia, the labor-abundant country, will export cloth, the labor-intensive good
5. In Australia the wage (w) is 10 Australian dollars (AUD) per hour, and the price of food (PF) is 2 AUD
per calorie. Then the real wage in units of food—defined as the amount of food that could be
bought with one hour’s wage—is calculated
a.
b.
c.
d.
by the formula w × PF and is equal to 20 calories of food
by the formula w/PF and is equal to 5 calories of food
by the formula w + PF and is equal to 12 calories of food
by the formula w - PF and is equal to 8 calories of food
6. Suppose Australia is the capital-abundant country and Brazil is the labor-abundant country. In
autarky, the real wage—defined as the amount of food that can be bought with an hour’s wage—
will be
a.
b.
c.
d.
e.
higher in Australia if food is the labor intensive good
higher in Brazil if food is the labor intensive good
higher in Australia
higher in Brazil
the same in both Australia and Brazil
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7. Suppose Australia is the capital-abundant country and Brazil is the labor-abundant country. In
autarky,
a. the real wage in units of food will be higher in Australia, and the real wage in units of cloth will
be higher in Brazil, if food is the labor intensive good
b. the real wage in units of food will be higher in Australia, and the real wage in units of cloth will
be higher in Brazil, if cloth is the labor intensive good
c. both real wages will be higher in Australia
d. both real wages will be higher in Brazil
e. the real wage in units of food will be the same in both Australia and Brazil, as will the real wage
in units of cloth
8. Suppose Australia is the capital-abundant country and Brazil is the labor-abundant country. In free
trade, the real wage—defined as the amount of food that can be bought with an hour’s wage—will
be
a.
b.
c.
d.
e.
higher in Australia if food is the labor-intensive good
higher in Brazil if food is the labor-intensive good
higher in Australia
higher in Brazil
the same in both Australia and Brazil
9. Suppose Australia is the capital-abundant country and Brazil is the labor-abundant country. Under
free trade,
a. the real wage in units of food will be higher in Australia, and the real wage in units of cloth will
be higher in Brazil, if food is the labor intensive good
b. the real wage in units of food will be higher in Australia, and the real wage in units of cloth will
be higher in Brazil, if cloth is the labor intensive good
c. both real wages will be higher in Australia
d. both real wages will be higher in Brazil
e. the real wage in units of food will be the same in both Australia and Brazil, as will the real wage
in units of cloth
10—12. In each blank, write one of the following words: higher, lower, same, unknown. Assume
autarky. Suppose you know that the real wage of labor (measured in units of food) is currently higher in
Brazil. Then it must be true that
10. the real wage of labor measured in units of cloth is higher in Brazil,
11. the real rental price of capital measured in units of food is lower in Brazil, and
12. the real rental price of capital measured in units of cloth is lower in Brazil.
13. (2 points) Suppose Australia is the capital-abundant country and Brazil is the labor-abundant
country. Also, suppose that food is the capital-intensive good and cloth is the labor-intensive good.
If autarky ends and free trade begins, the capital-labor ratio (which represents producers’ eagerness
to use capital rather than labor) will
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a. increase in cloth production and decrease in food production, in Australia. In Brazil, it will be the
opposite
b. increase in food production and decrease in cloth production, in Australia. In Brazil, it will be the
opposite
c. increase in both cloth production and food production, in Australia. In Brazil, it will decrease in
both the cloth and food industries
d. decrease in both cloth production and food production, in Australia. In Brazil, it will increase in
both the cloth and food industries
e. stay unchanged in both Brazil and Australia
f. increase in cloth production and decrease in food production, in both Australia and Brazil.
g. increase in food production and decrease in cloth production, in both Australia and Brazil
14—17. In each blank, write one of the following words: increase, decrease, unchanged, unknown.
Suppose Australia is the capital-abundant country and Brazil is the labor-abundant country. Also,
suppose that food is the capital-intensive good and cloth is the labor-intensive good. If autarky ends and
free trade begins,
14.
15.
16.
17.
the real wage in units of food (w/PF) will decrease in Australia and increase in Brazil,
the real wage in units of cloth (w/PC) will decrease in Australia and increase in Brazil,
the real rental price of capital in units of food (r/PF) will increase in Australia and decrease in Brazil,
the real rental price of capital in units of cloth (r/PC) will increase in Australia and decrease in Brazil.
18. “If the conditions of the Factor Price Equalization Theorem are satisfied, free trade in goods will
make the standard of living of every human being the same.” This statement is:
a. True
b. False, because free trade equalizes nominal factor prices, not real factor prices, which are what
our standard of living depends on
c. False, because, although free trade equalizes real factor prices and although each human being
is endowed with the same amount of labor, all human beings are not endowed with the same
amounts of non-labor resources (such as capital and land). Therefore, real incomes can vary
from person to person
d. False, because, although free trade equalizes real factor prices, all human beings are not
endowed with the same amounts of labor and non-labor resources (such as capital and land).
Therefore, real incomes can vary from person to person
19. The Factor Price Equalization Theorem says that
a. When there is free trade in goods, the nominal wage of a unit of (standardized) labor, w, will
become the same in all countries, as will the nominal rental price of a unit of (standardized)
capital, r. (Assume that the nominal prices in all countries are converted to the same currency
unit using market exchange rates.)
b. When there is free trade in goods, w/Px, which is the wage of a unit of (standardized) labor in
units of good X, will become the same in all countries, as will r/Px, the analogous price of capital
c. When there is free trade in goods, w/Px, which is the wage of a unit of (standardized) labor in
units of good X, will become the same in all countries, as will r/Px, the analogous price of capital,
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provided the free trade in goods is accompanied by the free movement of labor and capital
across countries
d. w/Px, which is the wage of a unit of (standardized) labor in units of good X, will become the
same in all countries, as will r/Px, the analogous price of capital, only if there is free movement
of labor and capital across countries. This will be true whether or not there is free trade in goods
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ANSWER SHEET HOMEWORK 6 (HECKSCHER-OHLIN THEORY) ECO41 FALL 2015 UDAYAN ROY
NAME: _______________________________________
DATE: ________________________________________
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Note: Questions 4 and 13 are worth 2 points each.
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