24 Questions
The HO model is particularly useful in analyzing patterns of trade between two countries with different technologies but similar factor endowments.
False
Higher transportation costs lead to increased imports in both countries.
False
The interval 𝑧'' − 𝑧' represents tradable goods.
False
Countries prefer to import rather than produce at home because transportation costs nullify the price advantage of importing cheaper goods.
False
The added cost of importing (g) makes foreign goods less expensive for the other country.
False
The HO model distinguishes between three factors of production.
False
The Ricardian model assumes only two goods.
False
The HO model is also referred to as the '3x3x3' model due to its structure.
False
When the domestic economy is opened up to trade, the increase in the price of Cloth (PC) will result in a decrease in wages (w) and an increase in returns to land (r)
False
In the foreign economy, workers benefit from the increase in wages, while landowners experience a decline in returns
False
The domestic economy is relatively more abundant in unskilled workers (T) than skilled workers (L)
False
Upon opening up the economy to trade, unskilled workers in the domestic economy benefit from increased demand, leading to higher wages
False
The return to capital is higher in more developed economies
False
In less developed economies, the return to capital is lower and wages are higher
False
The discussion about liberalizing capital movements in the 1970s centered on the idea that capital would flow from less developed to more developed economies
False
The movement of capital was expected to lead to a divergence in relative prices and returns to factors between economies
False
An increase in physical capital input K, with no change in labor input L, would always lead to an increase in output y.
False
Financial integration is always associated with lower infant mortality.
False
Trade integration has a strong and robust effect on economic growth in developing countries.
False
Total factor productivity (A) represents the quantity of physical capital input.
False
Increasing the level of inputs (K and L) would always lead to an increase in output, regardless of the efficiency of production (A).
False
A decrease in total factor productivity (A) would lead to a decrease in output, even with the same levels of inputs (K and L).
True
Advanced countries are financially closed, and most developing countries that have embraced financial integration do not go back.
False
Trade integration and financial integration have the same effects on economic growth in developing countries.
False
Study Notes
Effects of Trade Liberalization on Labor
- Upon opening up the domestic economy to trade, an increase in the price of Cloth (PC) leads to an increase in wages (w) and a decrease in returns to land (r).
- In the domestic economy, workers benefit from the increase in wages, while landowners experience a decline in returns.
- Conversely, in the foreign economy, landowners benefit from the increase in returns, while workers experience a decrease in wages.
- Skilled workers in the domestic economy benefit from increased demand, leading to higher wages.
- Unskilled workers may face challenges as they have to compete with foreign unskilled workers who may offer lower wages.
Discrepancies in Capital Movement and Convergence
- The domestic economy is relatively more abundant in capital compared to workers, leading to a lower return to capital and higher wages.
- Less developed economies are relatively more abundant in workers, with capital being scarce, leading to a higher return to capital and lower wages.
- The expectation of capital flowing from more developed to less developed economies was thought to lead to a convergence in relative prices and returns to factors between economies.
Transportation Costs and Trade
- Higher transportation costs lead to reduced imports as both countries prefer to produce goods domestically.
- The interval 𝑧'' − 𝑧' represents non-tradable goods, which are produced locally due to high trading costs.
- When production costs are similar between the two countries, adding transportation costs makes domestic production more economically viable.
The HO Model
- The HO (Heckscher-Ohlin) model focuses on the interaction between two economies with the same technology, but differences in factor endowments.
- The model is structured as a "2x2x2" model, involving two countries, two factors of production (labor and natural resources), and two goods (cloth and food).
- The model is useful in analyzing patterns of trade between two countries.
Production Function
- The production function is represented by 𝑦 = 𝐴𝐹(𝐾, 𝐿), where 𝑦 is output, 𝐴 is total factor productivity, 𝐾 is physical capital input, and 𝐿 is labor input.
- The function suggests that output is determined by the level of inputs and the efficiency of production.
- Technological progress and improvements in total factor productivity can lead to more output even with the same levels of inputs.
Trade Integration and Economic Growth
- A majority of studies find that trade integration helps promote economic growth in developing countries.
- A lower trade barrier is associated with lower infant mortality, but higher financial integration is not.
- Trade integration is connected to financial integration, and the effects of both are different.
- Advanced countries are financially open, and most developing countries that have embraced it do not go back.
This quiz explores the impact of opening a domestic economy to trade on wages and land returns. It examines the effects on workers and landowners in both domestic and foreign economies.
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