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
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Answer the question(s) below based on the following diagram of a country that is in international trade
equilibrium.
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
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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
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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
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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.
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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
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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
France has a comparative advantage in wheat. It will export X FI - V FI units of wheat
and import C FI - V FI units of shoes. Trade benefits owners of capital and hurts labor
in France. This occurs because production has shifted towards the more capitalintensive good thus lowering the demand for labor and increasing the demand for
capital. As a result, wages fall and the return to capital rises.
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Italy
Italy has a comparative advantage in shoes. It will export X FI - V FI units of shoes and
import C FI - V FI 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.
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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.
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