Introduction to the Heckscher-Ohlin Model
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Questions and Answers

What happens to productivity of factors of production in the short run after an economy liberalizes trade?

In the short run, productivity is determined by the factors' current industry usage, leading to varying wage/rental rates across countries.

How does the hourly compensation of manufacturing workers in China compare to that in the United States?

In 2013, hourly compensation for manufacturing workers in China was 11.3% of that in the United States.

Explain why factors of production may not move quickly to industries using abundant resources after trade liberalization.

Factors may not move quickly due to various barriers such as skills mismatch, relocation costs, or other constraints in the labor market.

What could explain the lower hourly compensation rates for manufacturing workers in Mexico compared to those in Germany?

<p>Lower compensation rates in Mexico compared to Germany can be attributed to differences in economic development, labor laws, and productivity levels.</p> Signup and view all the answers

Identify one factor that might cause wage/rental rates to vary across countries.

<p>Differences in economic conditions, such as labor supply and demand, can cause wage/rental rates to vary across countries.</p> Signup and view all the answers

What effect does an increase in the relative price of cloth have on the income of workers compared to capital owners?

<p>It raises the income of workers relative to that of capital owners.</p> Signup and view all the answers

According to the Rybczynski theorem, what happens to the supply of goods when a factor of production increases while holding output prices constant?

<p>The supply of the good that uses this factor intensively increases, while the supply of the other good decreases.</p> Signup and view all the answers

If the supply of labor in an economy increases, what is the effect on the production of labor-intensive goods like cloth?

<p>Production of cloth expands, while production of capital-intensive goods like food contracts.</p> Signup and view all the answers

How does an increase in the supply of labor affect the production possibility frontier (PPF)?

<p>It shifts the PPF outward, disproportionately towards cloth production.</p> Signup and view all the answers

What does it mean for an economy to have a high ratio of labor to capital regarding its production of food and cloth?

<p>It produces a high output of cloth relative to food.</p> Signup and view all the answers

In the context of Home and Foreign, why is Home considered relatively efficient at producing cloth?

<p>Home is relatively abundant in labor, which is a key factor in cloth production.</p> Signup and view all the answers

What occurs to real income when the relative price of cloth increases?

<p>Workers' real income rises while capital owners' real income falls.</p> Signup and view all the answers

What is the predicted outcome when the economy's labor force grows?

<p>The economy will employ more labor in cloth production and reduce the amount used in food production.</p> Signup and view all the answers

What are the main factors that contribute to trade between countries according to the Heckscher-Ohlin theory?

<p>Differences in labor, labor skills, physical capital, and other factors of production.</p> Signup and view all the answers

In the two-factor Heckscher-Ohlin model, what are the two goods produced?

<p>Cloth and food.</p> Signup and view all the answers

Why is the production possibilities frontier (PPF) not a straight line in the context of the Heckscher-Ohlin model?

<p>The opportunity cost in production is not constant due to multiple factors of production.</p> Signup and view all the answers

What is the implication of capital and labor being able to move across sectors in the long run according to the Heckscher-Ohlin model?

<p>It leads to equalization of returns, such as wage and rental rates, across different sectors.</p> Signup and view all the answers

What assumption does the Heckscher-Ohlin model make regarding technology and tastes between countries?

<p>The model assumes that countries have the same technology and the same tastes.</p> Signup and view all the answers

If the total amount of capital available for production is 3000, how is this capital typically used to produce cloth and food?

<p>It is used in a fixed mix based on the specific capital and labor requirements for each good.</p> Signup and view all the answers

In terms of factor endowment, what does comparative advantage imply in the Heckscher-Ohlin model?

<p>A country will have a comparative advantage in producing the good that uses its abundant factors of production more intensively.</p> Signup and view all the answers

Given the parameters in the problem, how many yards of cloth can be produced if K = 3000 and L = 2000?

<p>The production depends on the ratios of capital and labor used, which needs further calculation.</p> Signup and view all the answers

How does trade affect the relative prices of cloth and food in Home and Foreign?

<p>Trade raises the relative price of cloth in Home and lowers it in Foreign.</p> Signup and view all the answers

What does the total amount of labor available for production represent in the resource allocation of the Heckscher-Ohlin model?

<p>It represents the available human resources that can be employed in producing goods.</p> Signup and view all the answers

What are the equilibrium points for Home and Foreign before trade occurs?

<p>Home's equilibrium is at point 1, while Foreign's equilibrium is at point 3.</p> Signup and view all the answers

What does 'aKC = 2' imply in the context of producing one yard of cloth?

<p>'aKC = 2' means that 2 units of capital are required to produce one yard of cloth.</p> Signup and view all the answers

What happens to the production and consumption of cloth in Home following the rise in its price due to trade?

<p>Home experiences an increase in the relative production of cloth and a decrease in its relative consumption.</p> Signup and view all the answers

According to the Heckscher-Ohlin theorem, what type of goods does a country export?

<p>A country exports the good whose production is intensive in the factor it is abundant in.</p> Signup and view all the answers

Illustrate the relative supply curves' positions for Home and Foreign.

<p>Home's relative supply curve is positioned to the right of Foreign's relative supply curve.</p> Signup and view all the answers

What leads to the world relative price of cloth that lies between the pretrade prices for Home and Foreign?

<p>The convergence of relative supply and demand in both countries due to trade leads to the world relative price.</p> Signup and view all the answers

What characterizes cloth production in terms of labor and capital usage compared to food production?

<p>Cloth production is labor-intensive, using more labor relative to capital, while food production is capital-intensive.</p> Signup and view all the answers

How does an increase in the rental rate of capital impact the prices of cloth and food?

<p>An increase in the rental rate of capital affects the price of food more than cloth since food production is capital-intensive.</p> Signup and view all the answers

What does the Stolper-Samuelson theorem state about the relationship between relative prices of goods and factor income?

<p>The Stolper-Samuelson theorem states that if the relative price of a good increases, the real wage or rental rate of the factor used intensively in its production rises while the other factor's income decreases.</p> Signup and view all the answers

What happens to the labor-capital ratio in production when the relative price of cloth rises?

<p>When the relative price of cloth rises, the labor-capital ratio used in the production of both goods drops.</p> Signup and view all the answers

Why does an increase in the relative cost of labor lead to a higher price for the labor-intensive good?

<p>As the relative cost of labor increases, the relative price of the labor-intensive good must also increase to compensate for higher production costs.</p> Signup and view all the answers

In the context of production, what indicates that food production is more capital-intensive?

<p>Food production using a lower labor-capital ratio than cloth production indicates its capital-intensive nature.</p> Signup and view all the answers

How do competitive markets link the price of a good to its cost of production?

<p>In competitive markets, the price of a good equals its cost of production, which is determined by factor prices.</p> Signup and view all the answers

What effect does a higher wage-rental ratio have on the production of goods?

<p>A higher wage-rental ratio results in a lower labor-capital ratio used for the production of both cloth and food.</p> Signup and view all the answers

How does a rise in the price of cloth affect the purchasing power of labor and capital?

<p>A rise in the price of cloth increases the purchasing power of labor in terms of both goods while decreasing the purchasing power of capital.</p> Signup and view all the answers

What is the general effect of international trade on the distribution of income within a country?

<p>International trade benefits owners of abundant factors while harming owners of scarce factors in a country.</p> Signup and view all the answers

What does the Heckscher-Ohlin model predict about factor price equalization among countries that trade?

<p>The Heckscher-Ohlin model predicts that factor prices will be equalized among trading countries.</p> Signup and view all the answers

Why might factor prices not be equal across countries in the real world?

<p>Factor prices may not be equal due to differences in goods produced, technologies used, trade barriers, and transportation costs.</p> Signup and view all the answers

In what way does trade impact the demand for factors of production?

<p>Trade increases the demand for goods produced by relatively abundant factors, indirectly raising the demand and prices of those factors.</p> Signup and view all the answers

What effect does a rise in the price of food have on labor and capital?

<p>A rise in the price of food decreases the purchasing power of labor in terms of both goods while increasing the purchasing power of capital.</p> Signup and view all the answers

How does the intensity of factor use in production influence a country's exports?

<p>Countries tend to export goods that are produced intensively with factors they are abundantly endowed with.</p> Signup and view all the answers

What assumption does the Heckscher-Ohlin model make about the goods produced by trading countries?

<p>The model assumes that trading countries produce the same goods.</p> Signup and view all the answers

Study Notes

Introduction to the Heckscher-Ohlin Model

  • Trade occurs due to differences in resources across countries, beyond just labor productivity
  • The Heckscher-Ohlin theory suggests trade stems from variations in factors of production (labor, labor skills, physical capital, capital, and other production factors) across countries
  • Countries exhibit different relative abundances of production factors
  • Production processes utilize production factors with varying relative intensities

Two-Factor Heckscher-Ohlin Model

  • This model analyzes two countries (home and foreign) and two goods (cloth and food)
  • It considers two factors of production: labor and capital
  • The mix of labor and capital differs across goods
  • The overall supply of labor and capital within each country remains constant but varies between countries
  • In the long run, factors of production (labor and capital) can move across sectors, equalizing their returns (wages and rental rates)

Production Possibilities

  • In a multi-factor production framework, the opportunity cost of production isn't constant, and the production possibility frontier (PPF) is not a straight line due to variations in production factors' mix

  • For example, using a fixed mix of capital and labor, to produce one yard of cloth requires 2 units of capital and 2 units of labor. Further, one calorie of food requires 3 units of capital and 1 unit of labor; total amounts of capital and labor are fixed.

  • This creates supply limits, constraining the total quantities of cloth and food achievable

  • The PPF outlines the maximum combination of cloth and food production given constraints of fixed amounts of capital (K) and labor (L).

  • Constraints restrict the amount of cloth and food produced (e.g., 2QC +3QF <= 3000, 2QC +QF <= 2000)

  • Production points fall within or on the PPF curve.

  • The opportunity cost of producing more of one good increases as the economy moves toward greater production of that good (e.g., the opportunity cost of cloth in terms of food isn't constant, varying based on current production levels)

Choosing the Mix of Inputs

  • Producers choose production factor usages (capital and labor in varying amounts) to maximize output given prices of these inputs
  • Input choices depend on the wage (w) for labor and the rental rate (r) for capital
  • Changes in relative wages (w/r) affect production choices: A decrease in the rental rate, for example, leads to increased use of capital and less labor in production

Factor Prices and Goods Prices

  • In competitive markets, goods prices equal production costs
  • Variations in wages and rental rates affect production costs. How production costs are affected depends on the mix of inputs (proportion of capital and labor) used
  • Changes in relative prices (of goods) lead to changes in distribution of income for related inputs (e.g., a rise in the relative price of cloth increases the purchasing power of labor, but decreases that of capital)

Stolper-Samuelson Theorem

  • If a good's relative price increases, the factor used intensively in producing that good sees a rise in its real return, while the return of the other factor decreases
  • Relative price changes alter income distribution

Rybczynski Theorem

  • Holding output prices constant, an increase in one factor of production increases output of the good using that factor intensively, while decreasing output of the other good.

Trade in the Heckscher-Ohlin Model

  • Countries having similar technology and tastes will experience comparative advantage in producing the good utilizing factors where their country is relatively well-endowed
  • Trade based on factor endowment leads countries to export goods that use relatively abundant factors and import goods that use scarce factors.
  • The relative price of cloth rises in countries abundant in labor and declines in countries scarce in labor.

Factor Price Equalization

  • Free trade equalizes relative output prices and subsequently factor prices between countries
  • In theory, factor prices converge, but this doesn't often hold true in practice, with factors like trade barriers and transportation costs influencing price discrepancies for goods and factor inputs

Resources and Output

  • Changes in resource availability impact goods production levels. This is impacted by the Rybczynski theorem
  • An increased factor of production (like labor) tends to disproportionately boost production of the good using this factor intensively.

Trade and the Distribution of Income

  • Trade can impact income distribution, even in the long run. Owners of a country's abundant factors gain from trade, while those with scarce factors lose. Import-competing factors lose regardless of industry.

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Description

Explore the Heckscher-Ohlin model of trade and understand how differences in resource endowments between countries lead to comparative advantages. This quiz covers the two-factor model focusing on labor and capital in the context of trade between two countries. Test your knowledge of the factors affecting production and trade.

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