French Production Possibilities Frontier Quiz

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Questions and Answers

In a Heckscher-Ohlin model setting, if a country is relatively abundant in capital and reduces trade barriers, what is the predicted effect on the production of labor-intensive product A?

The production of product A will increase as labor becomes relatively cheaper. (correct)

The production of product A will decrease as labor becomes relatively cheaper.

The production of product A will decrease as capital becomes relatively cheaper.

The production of product A will increase as capital becomes relatively cheaper.

What is the Rybczynski theorem in the context of the Heckscher-Ohlin model?

It predicts that an increase in a factor endowment will lead to a proportionally larger increase in the output of the factor-intensive product. (correct)

It states that an increase in a country's endowment of capital will lead to an increase in the production of the capital-intensive product.

It shows how changes in factor endowments affect the relative prices of goods.

It explains how changes in factor endowments affect the quantities of goods produced.

When transitioning from autarky to international trade in a Heckscher-Ohlin model, what happens to the relative price of the abundant factor?

It fluctuates based on global market conditions.

It increases.

It decreases.

It remains constant. (correct)

How do the predictions of the Ricardian model differ from the Heckscher-Ohlin model?

The Ricardian model focuses on factor intensities, while the Heckscher-Ohlin model emphasizes factor abundance. Signup and view all the answers

If a labor-abundant country opens up to international trade, what is the expected impact on wages and returns to capital?

Wages will decrease and returns to capital will increase. Signup and view all the answers

According to the Stolper-Samuelson theorem, what would be the effect on European Union's real wages if a free trade agreement with Vietnam lowers the relative price of the labor-intensive good?

Decline Signup and view all the answers

What assumption is necessary for the result of declining EU real wages due to a free trade agreement with Vietnam to hold?

Both countries produce both goods Signup and view all the answers

In the specific-factors model scenario provided, what is the impact on workers' ability to afford goods when there is a decrease in the relative price of manufactured goods?

They can afford less of both goods Signup and view all the answers

How does the Stolper-Samuelson theorem predict the effect of lower returns to labor on the consumption of goods by workers?

Workers can afford less of all goods Signup and view all the answers

Between the HO and specific-factors models, which one is more realistic based on the scenarios described in the text?

HO model Signup and view all the answers

Which of the following best describes the main difference between the specific-factors model and the Heckscher-Ohlin model?

Specific-factors model allows for factor price sensitivity to endowments, unlike the Heckscher-Ohlin model which predicts factor price equalization. Signup and view all the answers

In the context of trade impact under the specific-factors model, which statement is most accurate?

Trade will cause factor prices to vary depending on the sector-specific immobility of factors. Signup and view all the answers

Which scenario is consistent with the predictions of the Heckscher-Ohlin model when barriers to trade are reduced?

Factor prices will equalize across countries due to free trade agreements. Signup and view all the answers

Which statement accurately reflects the implication of transitioning from autarky to international trade according to the text?

Transitioning to trade might reveal discrepancies in factor prices among countries. Signup and view all the answers

When comparing the Heckscher-Ohlin model with the Ricardian model, what is a key distinguishing factor as discussed in the text?

Heckscher-Ohlin model accounts for differences in factor endowments between countries, while the Ricardian model does not. Signup and view all the answers

According to the Stolper-Samuelson theorem, what happens when there is an increase in the relative price of a good?

The real return to the factor used intensively in producing that good increases, and the real return to the other factor reduces. Signup and view all the answers

In the Heckscher-Ohlin model, which good do countries have a comparative advantage in?

Employs a relatively large amount of their abundant factor. Signup and view all the answers

What is predicted by the Factor Price Equalization result of the Heckscher-Ohlin model?

The prices of factors will equalize between countries. Signup and view all the answers

How does an increase in a factor endowment affect output in the Heckscher-Ohlin model?

Increases output of the industry using it intensively, without changing output of the other industry. Signup and view all the answers

What is one effect of reducing trade barriers according to the given text?

The owners of factor specific to import goods benefit while others are hurt. Signup and view all the answers

Based on the text, what does the Rybcyznski theorem predict about the effect of an increase in labor endowment on output?

The output of the industry using labor intensively will increase. Signup and view all the answers

In the Heckscher-Ohlin model, a decrease in the capital-labor ratio to levels below aAK/aAL would result in:

Specialization in the labor-intensive sector. Signup and view all the answers

What is the implication of Equations (5) and (6) according to the Heckscher-Ohlin model?

One industry's output increases while the other decreases. Signup and view all the answers

How does a reduction in the capital-labor ratio below aAK/aAL affect the production levels of the two goods?

Good A's production increases while good B's production decreases. Signup and view all the answers

What happens to the production levels of good B when the capital-labor ratio falls below aAK/aAL?

Production of good B reaches zero. Signup and view all the answers

What is emphasized by the magnification effect in the Heckscher-Ohlin model?

The effect of an increase in a factor endowment on output is more than proportional. Signup and view all the answers

What would happen to production levels if the country transitions from autarky to international trade based on the Heckscher-Ohlin model?

One good's production will increase while the other decreases with specialization. Signup and view all the answers

How does a financial crisis reducing the capital-labor ratio below aAK/aAL impact specialization according to the text?

The country specializes in labor-intensive manufacturing. Signup and view all the answers

What does the Heckscher-Ohlin model predict about the effects of an increase in a factor endowment on industry output?

An increase in factor endowment leads to an unequal change in industry outputs. Signup and view all the answers

How does an economic crisis affecting K/L impact the Rybcyznski theorem predictions?

It emphasizes the theorem by leading to specialization based on factor endowments. Signup and view all the answers

What could be a potential explanation for the claim that the Heckscher-Ohlin model is 'hopelessly inadequate as an explanation for historical and modern trade patterns'?

The assumptions of the model do not hold in real-world scenarios. Signup and view all the answers

What is the primary reason some economists find fault with the Heckscher-Ohlin model when examining the effects of trade liberalization?

It fails to account for the distributional impacts on different factors of production. Signup and view all the answers

Which situation aligns with the predictions of the Heckscher-Ohlin model when barriers to trade are removed?

Increased specialization in industries that utilize abundant resources. Signup and view all the answers

In what way do the predictions of the Ricardian model differ significantly from those of the Heckscher-Ohlin model?

Ricardian model predicts complete factor price equalization, whereas Heckscher-Ohlin does not. Signup and view all the answers

Why might some argue that transitioning from autarky to international trade based on the predictions of the Heckscher-Ohlin model could lead to significant welfare gains for countries involved?

Specialization based on comparative advantage increases total output. Signup and view all the answers

According to the Heckscher-Ohlin model, what happens when a country reduces its trade barriers?

Expand production of the good that uses intensively its scarce factor. Signup and view all the answers

When a country transitions from autarky to international trade and begins to export bicycles, what is a prediction of the Heckscher-Ohlin model but not of the Ricardian model?

Labor will move from another sector of the economy into the bicycle sector. Signup and view all the answers

In the context of international trade, what does the Heckscher-Ohlin model suggest about factors of production in different countries?

They will tend to be paid similarly under free trade. Signup and view all the answers

What is a prediction of the Heckscher-Ohlin model when a country reduces trade barriers and increases its participation in international trade?

The country's scarce factor will see an increase in real wage. Signup and view all the answers

When comparing the Ricardian and Heckscher-Ohlin models regarding trade liberalization and specialization, what is a key distinction between the two?

Ricardian model implies all factors are perfectly mobile, while Heckscher-Ohlin considers factors to be immobile between sectors. Signup and view all the answers

Study Notes

Heckscher-Ohlin Model

If a country is relatively abundant in capital and reduces trade barriers, the production of labor-intensive product A will decrease.
The Rybczynski theorem states that an increase in the endowment of a factor will lead to an increase in the production of the good that uses that factor intensively.
When transitioning from autarky to international trade, the relative price of the abundant factor will decrease.
The Heckscher-Ohlin model predicts that countries will specialize in the production of goods that use their abundant factors intensively.

Comparison with Ricardian Model

The Ricardian model assumes that countries have different technologies, whereas the Heckscher-Ohlin model assumes that countries have different factor endowments.
The Ricardian model predicts that countries will specialize in the production of goods for which they have a comparative advantage in terms of technology, whereas the Heckscher-Ohlin model predicts that countries will specialize in the production of goods that use their abundant factors intensively.

Stolper-Samuelson Theorem

The Stolper-Samuelson theorem states that an increase in the relative price of a good will lead to an increase in the real return to the factor used intensively in that good and a decrease in the real return to the other factor.
If a free trade agreement with Vietnam lowers the relative price of the labor-intensive good, the real wages in the European Union will decrease.

Specific-Factors Model

In the specific-factors model, the production of goods is affected by the availability of specific factors, rather than just the relative abundance of factors.
A decrease in the relative price of manufactured goods will lead to an increase in the consumption of goods by workers.

Factor Price Equalization

The Factor Price Equalization result of the Heckscher-Ohlin model states that trade will lead to equalization of factor prices across countries.
An increase in a factor endowment will lead to an increase in the output of the good that uses that factor intensively.

Trade Liberalization

Reducing trade barriers will lead to an increase in the production of goods that use the abundant factor intensively.
The Heckscher-Ohlin model predicts that trade liberalization will lead to significant welfare gains for countries involved.

Criticisms of the Heckscher-Ohlin Model

The Heckscher-Ohlin model is often criticized for being "hopelessly inadequate" as an explanation for historical and modern trade patterns.
The primary reason for this criticism is that the model assumes that countries have different factor endowments, but does not take into account other factors that can affect trade patterns.

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Test your knowledge on the impact of shocks on a country's production possibilities frontier using the example of France's clothing and food industries. Explore how changes in technology and resources allocation can shift the equilibrium point on the PPF graph.