ECO 391 exam 2
In the simple trade model, what is assumed about labor?
It is perfectly mobile between the two industries within a nation.
Comparative advantage can change over time. True/False
True
A country possesses a comparative advantage in the production of a product if A) the opportunity cost, in terms of the amount of other products that it gives up to produce this product, is lower than it is for its trading partners. B) it possesses an absolute advantage in the production of this good compared to its trading partners. C) it is able to produce less of this good per worker than its trading partners. D) it can produce more of this good per hour than its trading partners.
A
A production possibilities curve that is a straight line represents the case of A) constant costs. B) increasing costs. C) constant opportunity costs but increasing real costs. D) constant opportunity costs but decreasing real costs.
A
After trade opens, the short run impact on the income of the specific factor that is relatively scarce will be A) a decrease in its income. B) an increase in its income. C) no change in its income. D) indeterminate, income effects are not possible to know.
A
Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2 economics reports or 1 sales call, which of the following is FALSE? A) Sandy has a comparative advantage in sales calls. B) Tim has a comparative advantage in sales calls. C) Sandy has a comparative advantage in economics reports. D) Sandy has an absolute advantage in both economics reports and sales calls.
A
Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2 economics reports or 1 sales call, which of the following would NOT be a mutually agreeable terms of trade for Sandy and Tim? A) 1 economics report for 1 sales call B) 1 sales call for 3 economics reports C) 1 sales call for 4 economics reports D) 1 economics report for 1/4 of a sales call
A
Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2 economics reports or make 1 sales call, we can conclude that A) Sandy should specialize in economics reports, and Tim should specialize in sales calls. B) Sandy should produce both economics reports and sales calls since she cannot possibly gain from trade with Tim. C) Tim should specialize in producing economics reports, and Sandy should specialize in producing sales calls. D) Tim should produce both economics reports and sales calls.
A
If the world price for a good is above a nation's pre-trade equilibrium price, then the nation A) will export the good. B) will import the good. C) will neither export nor import the good. D) cannot gain from trade. E) Both C and D.
A
If two countries agree to specialize and trade based on comparative advantage, which of the following is most likely to be true? A) Both of the countries will consume outside their respective production possibilities curves. B) One of the countries will end up receiving all of the gains from trade. C) One of the countries will both consume and produce on its production possibilities curve. D) Only one of the countries will produce on and consume outside its production possibilities curve.
A
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, then A) the United States has a comparative advantage in corn production. B) Mexico has a comparative advantage in corn production. C) the United States cannot gain from trade with Mexico. D) the United States has a comparative advantage in auto production.
A
Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn. Suppose opportunity costs are constant. Given these production possibilities, A) Paraguay has a comparative advantage in wheat. B) Paraguay has a comparative advantage in corn. C) Paraguay has a comparative advantage in both goods. D) Paraguay has an absolute advantage in neither good.
A
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the Stolper-Samuelson Theorem, the incomes of the owners of ________ are likely to rise in Brazil after trade with Chile begins. A) capital B) labor C) natural resources D) It is impossible to determine which will be favored.
A
Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can produce 6 units of timber or 2 units of grain. Which of the following is CORRECT? A) Mexico has a comparative advantage in grain production. B) Mexico has an absolute advantage in timber production. C) Canada has a comparative advantage in grain production. D) The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber.
A
Suppose that Sandy can produce 10 economic reports or make 2 sales calls. Suppose Tim can produce 2 economic reports or make 1 sales call. Which of the following is CORRECT? A) The opportunity cost for Sandy of producing one economics report is 1/5 of a sales call. B) The opportunity cost for Sandy of producing one sales call is 10 economics reports. C) The opportunity cost for Tim of producing one sales call is 1/2 of an economics report. D) The opportunity cost for Tim of producing one economics report is 2 sales calls.
A
Suppose that a country is producing on its PPC at a point to the left of the tangency between the trade line and the PPC. At the production point, A) the opportunity cost in production of the good on the horizontal axis is less than its trade price. B) the opportunity cost in production of the good on the horizontal axis is more than its trade price. C) the opportunity cost in production of the good on the vertical axis is less than its trade price. D) the opportunity cost in production of the good on the horizontal axis may be either less than or more than its trade price.
A
The demand for labor is said to be a derived demand because it comes from the demand for goods that labor produces. Suppose that strawberries are a labor-intensive good. An increase in the price of strawberries will ________ the demand for strawberries, which will ________ the demand for strawberry pickers. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease
A
The straight-line production possibilities curve A) does not show increasing opportunity costs. B) fails to reflect tradeoffs. C) fails to benefit trading nations. D) refutes the principles of comparative advantage.
A
Tijuana, Mexico is across the border from San Diego, California. It has become a world-leading producer and exporter of television sets and computer monitors, which it assembles in modern factories owned by multinational consumer electronics firms such as Sony. Initially, these electronics were produced in the industrialized countries of their parent companies, and after several years, the production moved to Tijuana. This is an example of A) the product cycle. B) intraindustry trade. C) the specific factors model. D) the magnification effect.
A
US. U.K Wheat 12 6 Cloth 6 18 The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour). According to Adam Smith, which of the following is true? A) The United States has an absolute advantage in the production of wheat. B) The United States has an absolute advantage in the production of cloth. C) There is no basis for trade between these countries. D) The United States will gain more from trade than the United Kingdom.
A
With trade, the slope of the Consumption Possibilities Curve (CPC) is equal to A) the world price of the good on the horizontal axis. B) the world price of the good on the vertical axis. C) the opportunity cost of the good on the horizontal axis. D) the opportunity cost of the good on the vertical axis.
A
A production possibilities curve that is bowed out represents the case of A) constant costs. B) increasing costs. C) decreasing costs. D) external costs.
B
Based on the theory of comparative advantage, nations maximize their well-being when they A) create more jobs. B) allocate resources more efficiently. C) increase trade surpluses. D) increase exports.
B
Empirical tests of the HO model have had mixed results. One explanation for this is that A) the Ricardian model is more detailed. B) it is difficult to measure factor endowments. C) it does not explain the effects of trade on income. D) it assumes that countries have different technologies.
B
For a country in autarky, the opportunity cost of the good on the horizontal axis is the same as A) the relative price of the good on the vertical axis. B) the relative price of the good on the horizontal axis. C) the opportunity cost of the good on the vertical axis. D) the nominal price of the good on the horizontal axis.
B
If a country is currently producing at a production point such that the trade line has a slope that is flatter than the slope of the PPC at the same point, then A) the country can get greater gains from trade if it moves production away from the good on the vertical axis. B) the country can get greater gains from trade if it moves production toward the good on the vertical axis. C) the country cannot improve on its gains from trade. D) There are no gains from trade in this example.
B
If a nation has no absolute advantage, then it A) cannot gain from trade. B) still gains from trade. C) can only gain from trade if it raises its productivity levels. D) can only gain from trade if it produces outside its production possibilities curve.
B
If one nation is able to produce a good at a lower opportunity cost than another, it has A) an absolute advantage in that good. B) a comparative advantage in that good. C) a productivity advantage in that good. D) a technological advantage in that good.
B
In our simple trade model, having a comparative advantage in a product implies that a country will specialize completely in the product A) with the highest opportunity cost. B) with the lowest opportunity cost. C) where total output is lower per worker-hour. D) where total output is greater per worker-hour.
B
Suppose that Paraguay can produce 12 wheat or 3 corn and Bolivia can produce 4 wheat or 2 corn. Suppose that opportunity costs are constant. Which of the following is a potentially agreeable trade arrangement for Paraguay and Bolivia? A) Paraguay trades one corn to Bolivia for three units of wheat. B) Bolivia trades one corn to Paraguay for three units of wheat. C) Bolivia trades one corn to Paraguay for one wheat. D) Paraguay trades one wheat to Bolivia for two corn.
B
The economic philosophy that favors strict limits on imports and strong support for exports is called A) zero sum. B) mercantilism. C) comparative advantage. D) absolute advantage.
B
When economists talk about the gains from trade they mean that A) no one ever gets hurt by trade. B) the benefits of trade outweigh the losses. C) business firms benefit from trade but not necessarily individuals. D) trade increases government revenue through taxes on imports. E) economic restructuring is usually quick and painless.
B
Explain why government actions that make industries more competitive do not create comparative advantage.
Because governments spend resources in order to make industries more competitive, price of goods in these industries no longer reflects the true costs of production (on which comparative advantage is based.
Certain kinds of tropical fruits are impossible to grow outdoors in the United States. Suppose, however, that in order to create jobs in Wyoming, the U.S. government offered extensive subsidies to firms to produce bananas. With the subsidies, firms could build greenhouses and offer the fruit at world prices. A) The United States now has a comparative advantage in bananas. B) The United States has a comparative advantage, but is not competitive. C) The United States is competitive, but does not have a comparative advantage. D) The United States has a comparative advantage and is competitive.
C
Empirical tests of the theory of comparative advantage have provided A) strong support for both the Ricardian and Heckscher-Ohlin models. B) mixed support for the Ricardian model and strong support for the Heckscher-Ohlin model. C) strong support for the Ricardian model and mixed support for the Heckscher-Ohlin model. D) mixed support for both Ricardian and Heckscher-Ohlin models. E) no support for either the Ricardian or the Heckscher-Ohlin models.
C
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then A) Chile will produce more computers after trade begins with Brazil. B) Brazil will produce more timber after trade begins with Chile. C) Chile will produce more timber after trade begins with Brazil. D) Brazil will completely specialize in computers once trade begins with Chile.
C
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the Heckscher-Ohlin Theorem, Chile should export goods that A) intensively use labor input. B) intensively use capital input. C) intensively use natural resources. D) use capital and labor in about equal proportions.
C
The Stolper-Samuelson Theorem predicts A) the level of productivity in export industries. B) which factors are abundant. C) the income distribution effects of trade. D) which goods will be exported.
C
Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive, A) Mexico will produce more soybeans once trade is introduced. B) the United States will produce more avocados once trade is introduced. C) avocado prices in the United States will fall once trade begins. D) soybean prices in Mexico will rise once trade begins.
C
Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive, it would be reasonable to expect the United States to A) specialize completely in soybean production. B) specialize completely in avocado production. C) increase soybean production, but still produce some avocados. D) increase avocado production, but still produce some soybeans.
C
Which types of workers are most likely to favor lowering trade barriers in the United States?
Highly educated and more skilled workers
Using the specific factors model, assume that strawberry production requires the specific factor of land, tractor production requires the specific factor of capital, and labor is variable. If the United States is capital abundant compared to Mexico, and Mexico is land abundant compared to the United States, then in the short run with trade, which of the following is true? A) Mexican wages will rise more than the increase in the price of tractors in Mexico. B) U.S. wages will rise less than the fall in the price of tractors in the United States. C) The owners of capital in the United States will see a larger increase in their incomes in percentage terms than the increase in the price of tractors. D) The owners of land in Mexico will see a smaller increase in their incomes in percentage terms than the increase in the price of strawberries.
C
Which of the following is true according to the case study on U.S. / China trade presented in the chapter? A) China has relative abundance in capital. B) China has relative abundance in skilled labor. C) The United States has relative scarcity in unskilled labor. D) The United States has relative scarcity in capital.
C
Which of the following would be associated with the early phase of the product cycle? A) Large amounts of production in low-income, developing countries B) A standardized product with an assembly-line style production process C) Sophisticated marketing and customer feedback mechanisms D) More consumption in low-income, developing countries
C
If a country has lower overall productivity levels than its trading partners, then it will A) be unable to export. B) have a trade deficit. C) not be able to obtain gains from trade. D) have a lower standard of living than its trading partners.
D
A country will gain relatively more from trade when A) trade is regulated. B) the world price is close to the country's opportunity cost of the good. C) the world price is below the country's opportunity cost of the good. D) the world price is much greater than the country's opportunity cost for the good.
D
Absolute and Comparative Productivity Advantage Contrasted 1) The United States' comparative advantage over Japan in the production of rock-n-roll music implies that (for a similar quality of music) the A) opportunity cost of production is less in Japan. B) absolute cost of production is less in the United States. C) absolute cost of production is less in Japan. D) opportunity cost of production is less in the United States.
D
After trade opens, the short run impact on the income of the variable factor will be A) a decrease. B) an increase. C) zero. D) indeterminate, depending on the consumption pattern of the owners of the variable factor.
D
All of the following are true EXCEPT A) trade between two nations reduces their opportunity costs. B) trade makes nations dependent on each other. C) trade between nations will not benefit all citizens. D) the principle of comparative advantage does not apply to countries with limited resources.
D
Competition between the United States and Mexico is A) equivalent to the competition between two giant corporations. B) a struggle over which country will get the best jobs. C) unfair if wages in Mexico are lower than in the United States. D) not a meaningful way to analyze trade.
D
Economic restructuring that takes place as a result of opening to trade with other countries A) contradicts the idea of gains from trade. B) causes some trading activity to be zero sum. C) worsens the nation's allocation of resources. D) improves the nation's allocation of resources.
D
If the case study on U.S. / China trade is correct in its analysis of factor abundance, A) Chinese capital owners should see their income rise as trade increases. B) U.S. skilled labor inputs should see their incomes fall as trade increases. C) U.S. capital owners should see their income fall as trade increases. D) Chinese unskilled labor should see their income rise as trade increases.
D
If the price of a good rises, then the effect on the income of the factors that are used intensively in its production will be A) to raise income by an absolute amount that is less than the rise in prices. B) to raise income by an absolute amount that is more than the rise in prices. C) to raise income by a smaller percentage than the rise in prices. D) to raise income by a greater percentage than the rise in prices.
D
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, which of the following would NOT be a potential terms of trade? A) 1 auto for 3 corn B) 1 auto for 4 corn C) 1 corn for 1/3 of an auto D) 1 corn for 1 auto
D
Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film. Suppose that opportunity costs are constant. Which of the following is FALSE? A) Canada has an absolute advantage in timber production. B) Mexico has a comparative advantage in film production. C) The opportunity costs for producing timber are lower in Canada than in Mexico. D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to six units of timber.
D
The Heckscher-Ohlin Theorem predicts A) who benefits and who loses from trade. B) which factors are abundant. C) the income distribution effects of trade. D) which goods will be exported.
D
The basis for free trade is the concept of A) absolute advantage. B) differences in natural resources and climate. C) differences in nominal wages. D) comparative advantage.
D
US. U.K Wheat 12 6 Cloth 6 18 The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour). In order for both countries to gain from trade, one bushel of wheat must trade for A) between 6 and 18 yards of cloth. B) between 1/2 and 2 yards of cloth. C) between 1/3 and 3 yards of cloth. D) between 1/2 and 1/3 yards of cloth.
D
Using the specific factors model, assume that strawberry production requires the specific factor of land, tractor production requires the specific factor of capital, and labor is variable. If the United States is capital abundant compared to Mexico, and Mexico is land abundant compared to the United States, then in the short run with trade we would expect A) the income of U.S. land owners to increase. B) the income of U.S. workers to increase. C) the income of Mexican workers to increase. D) the income of Mexican land owners to increase.
D
Which of the following is NOT a proposition of the Heckscher-Ohlin model? A) A country has a comparative advantage in the production of that commodity which uses more intensively the country's more abundant resource. B) The effect of international trade is to tend to equalize factor prices between the trading nations. C) If the United States is a skilled labor abundant country, then the United States has a comparative advantage in the production of goods that use skilled labor more intensively. D) Countries will completely specialize in the product in which they have a comparative advantage if free trade is allowed to occur.
D
Which of the following is true? A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The Wealth of Nations. B) David Ricardo proposed the theory of absolute advantage as the basis for trade. C) Absolute advantage is based on comparing the opportunity costs of trading partners. D) The Ricardian model assumes labor is perfectly mobile.
D
Which of the following statements is FALSE? A) Comparative advantage is the principle upon which trade patterns are based. B) Opportunity cost measures the real cost to a country of producing a certain product. C) The gains from trade are the result of differences in opportunity cost and comparative advantage. D) A country that possesses an absolute advantage will always have a comparative advantage.
D
Which of the following would NOT be associated with the LATE PHASE of the product cycle? A) Consumption in high income countries begins to exceed production. B) Increasing share of output is moving to developing countries where abundant low skilled and semi-skilled labor keep production costs low. C) Consumption continues to grow in low income countries. D) There is experimentation and improvement in design and manufacturing.
D
Which economist introduced the simple trade model and the concept of trade based on comparative advantage?
David Ricardo
What is the source of comparative advantage in the Heckscher-Ohlin model?
Differences in factor endowments
Explain how a country with no absolute advantage can gain from trade.
Even if a country cannot produce absolutely more of a good, it can still have a comparative advantage. This means that it is relatively better at producing a given good. Thus if it specializes in producing the good that it produces at a relatively lower cost and trades for goods that it can only produce at a relatively higher cost, it will gain from trade.
A country is likely to be better off in the long run if it pursues self-sufficiency. True/False
False
A nation must have an absolute advantage in order to have a comparative advantage in producing a good or service. True/False
False
Adam Smith created the theory of comparative advantage. True/False
False
All individuals and firms in a country must gain from trade in order for it to be beneficial to the nation. True/False
False
OLI theory is a direct contradiction of trade theory, especially trade theory based on comparative advantage. True/False
False
Since empirical tests of the HO theory have given mixed results, the theory has little value. True/False
False
Test of the HO theory have clearly been successful. True/False
False
The L in OLI theory stands for loyalty, and this factor makes it more difficult for firms to substitute foreign operations for domestic as they fear a loss of sales due to negative publicity. True/False
False
The gains from trade rely on overall productivity (absolute advantage). True/False
False
The opportunity cost of producing in low-income, developing countries rises over the product cycle, according to theory. True/False
False
Assume that both the United States and Germany produce beef and computers. The U.S. can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500 computers or 250 pounds of beef per day. Graph the PPCs for each country, putting computers on the horizontal axis. Then identify the slopes of the PPCs. What does the slope represent?
Graphs should show: Germany: horizontal intercept = 500, vertical intercept = 250, slope = -1/2. U.S.: horizontal intercept = 200, vertical intercept = 1,000, slope = -1/5 The slope of the line represents the opportunity cost of the good on the horizontal axis (computers).
Assume that both the United States and Germany produce beef and computers. The U.S. can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500 computers or 250 pounds of beef per day. What is the opportunity cost of beef and computer chips in each country? In which good does each country have a comparative advantage? What is the range for mutually beneficial trade in computers?
In the U.S., the opportunity cost of computers is 5 pounds of beef. The opportunity cost of a pound of beef is 1/5 computer. In Germany, the opportunity cost of a computer is 1/2 pound of beef. The opportunity cost of a pound of beef is 2 computers. Since 1/5 is less than 1/2, the U.S. has a comparative advantage in beef, and likewise, Germany has a comparative advantage in computers. For both nations to benefit, a computer must trade for between 1/5 and 1/2 pounds of beef.
What did Adam Smith perceive was primarily responsible for improving standard of living?
Increased specialization in production
Given the Republic of Korea's experience, what can we conclude about comparative advantage?
It can change over time. More skill and more capital can be developed as income rises, changing productivity.
What results has the Republic of Korea experienced from its change in policies?
It has successfully industrialized. Its index of openness is many times greater and incomes have grown almost 6 percent per year over the period.
Describe some of the key controversies regarding global cotton trade between high cost and low cost cotton producers.
Low cost cotton producers produce less cotton in total, but rely more on cotton exports for income. Their low incomes put them on the edge of survival and the fact that they make less in total to export makes cotton export revenues critical. High cost cotton producers depend much less on their cotton exports and have much higher incomes. High cost cotton producers are assisted through direct and indirect payments from their governments, tariffs on cotton imports, farm support programs including subsidized loans, insurance, marketing and promotion assistance, and revenue guarantees. These programs keep cotton production where it is less efficient and have the potential to harm living standards in developing nations and keep them from fully exploiting their comparative advantage in cotton.
What type of policies did Adam Smith attack in his book, An Inquiry into the Nature and Causes of the Wealth of Nations?
Mercantilism
In the Heckscher-Ohlin model, what assumption is made about opportunity costs?
Opportunity costs increase with increased production of any good.
Explain some of the reasons why the HO model is difficult to test empirically. Does this mean that it is not a useful model of trade?
Problems with accurately measuring factor endowments and standardizing units for that they can be compared make it difficult to test the HO model. The model also cannot capture technological differences between countries, as well as a variety of other factors, such as economic policy, economies of scale, and corporate structure. Even with these issues, economists generally believe that endowments matter and that the HO model is a useful way of explaining the effects of trade on factors of production.
A country that creates competitive advantage where there are not comparative advantages misallocates its resources and has lower national well-being. True/False
True
According to OLI theory, a firm might be unwilling to license its production to a foreign firm for fear that its technology may be stolen or its brand name harmed, which leads the firm to internalize control over its asset and set up its own foreign subsidiary. True/False
True
Why did Adam Smith criticize the trade barriers imposed by the mercantilists?
Smith was highly critical of trade barriers because they decrease specialization, technological progress, and wealth creation. He also recognized that imports enable a country to obtain goods that it cannot make or cannot make as cheaply, while exports are made for someone else and are useful only if they lead to imports.
How would the opening of trade affect the incomes of workers in the U.S. and China? Use the case studies in the chapter on U.S. trade with China to support your answer.
Students should have a clear statement of the Stolper-Samuelson theorem. • Trade benefits the nation's abundant factor and harms the nation's scarce factor. • Thus, since the U.S. is abundant in skilled labor, skilled workers should be better off, and unskilled workers should be worse off. The reverse is true in China.
When did the Republic of Korea change its economic policies?
The 1960's
What is productivity?
The amount of output from a unit of an input
If a nation is more productive than a trading partner, can it still gain from trade with that partner? Use the concepts of absolute and comparative advantage to explain.
The gains from trade do not rely on overall productivity (absolute advantage) but on differences in relative prices (comparative advantage). In producing a good or service, as long as a trading partner gives up fewer units of an alternate product, we can gain from trade with them.
Free trade may be good for a nation, but not for everyone in the nation. Explain why free trade is controversial and the list the justifications that proponents of trade adjustment assistance offer in support of those policies.
The nation as a whole is better off as long as the gains from the winners exceed the losses from the losers. Restructuring means that some industries are dying and workers and producers have to find other opportunities. This may be difficult for not only those directly involved in the industry, but also for the surrounding communities. Adjustment assistance states that since the nation as a whole benefits from trade, there are newly added resources that can be used for compensation. Second, there is a potential ethical obligation to assist those hurt by economic change. Third, compensation reduces the incentives for those hurt by trade to fight against free trade policies.
Chinese exports of toys and footwear can be explained by factor endowments, while Chinese exports of telecommunications equipment and computers and accessories can be explained by product-cycle analysis. True/False
True
Mercantilists perceived trade as a zero sum game. True/False
True
Nations that have only a single abundant resource face significant risks, even when that resource is highly valued. True/False
True
Offshoring became a concern in the 1980s when modern communication and transport technology made it possible for firms to relocate production abroad. True/False
True
The O in OLI theory stands for ownership, and the asset owned can be tangible or intangible. True/False
True
The nation as a whole is better off from trade as long as the gains from the winners exceed the losses from the losers. True/False
True
What is the Heckscher-Ohlin theorem? Using the case studies in the chapter on U.S. trade with China describe the theory and the resulting trade patterns that would support it.
• A clear statement of the HO Theorem along the lines that nations differ in their endowments of factors of production, products differ in how intensively they use various factors of production, so a nation that has a relative abundance in a specific factor of production compared to its trading partner will have a comparative advantage in products that use that factor of production more intensively. • The U.S. would have an abundance of capital and skilled labor and China unskilled labor. The text offers data that supports this.
