ECON 321 Exam #2 Ch. 4
(Table: Factor Use in Trade) In the hypothetical economy provided, what is the capital-to-labor ratio for exports?
$18,490
(Table: Factor Use in Trade) In the hypothetical economy provided, what is the capital-to-labor ratio for imports?
$31,250
(Figure: A Country's Before and After Trade Equilibria) How many computers will this nation import?
0
(Figure: A Country's Before and After Trade Equilibria) How many shoes will this nation export?
0
(Table: Data on Suburbia) How many units of which product will Suburbia import?
1,500 units of Y
(Table: Data on Suburbia) What is the ratio of total capital to total labor in Suburbia?
1.67 units/day
(Figure: A Country's Before and After Trade Equilibria) How many computers will this nation export?
125
(Figure: A Country's Before and After Trade Equilibria) What are the post-trade quantities of shoes and computers produced by this nation?
150 shoes; 300 computers
(Figure: A Country's Before and After Trade Equilibria) What are the pretrade quantities of shoes and computers produced by this nation?
225 shoes; 200 computers
(Figure: A Country's Before and After Trade Equilibria) How many shoes will this nation import?
350
(Figure: Home and Foreign Autarky Equilibria) Which line above represents the Home relative price of computers in terms of shoes?
A
(Figure: A Country's Before and After Trade Equilibria) The trade triangle shows the exports that were exchanged for imports. What are the three points of the trade triangle?
A, D, C
A retest of the HO prediction and the Leontief paradox for the United States reveals that:
All of the answer choices are correct.
Which of the following is a possible explanation for the Leontief paradox?
All of these answer choices are possible explanations for the Leontief paradox.
(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual employee compensation (including fringe benefits) for 1990 in several U.S. industries. China and India are labor abundant relative to the United States. According to the HO model, we assume U.S. apparel and clothing, leather and leather products, and textiles and textile products industries were most likely to face the strongest competition from Chinese and Indian imports in 1990. Why do we reach this conclusion?
Apparel and clothing, leather and leather products, and textiles and textile products all use labor- intensive production techniques.
(Figure: A Country's Before and After Trade Equilibria) At what point will the nation pictured be in a no-trade equilibrium?
B
(Figure: Home and Foreign Autarky Equilibria) Which line above represents the Foreign relative price of computers in terms of shoes?
B
(Figure: A Country's Before and After Trade Equilibria) What is the equilibrium post-trade point of production?
C
(Figure: Home and Foreign Autarky Equilibria) At which point will the Home nation find its no-trade equilibrium consumption and production point?
C
LCD TVs are capital intensive, and tennis rackets are labor intensive. Suppose Canada has $100 billion of capital and 2 million workers and Mexico has $10 billion of capital and 20 million workers. According to the HO model:
Canada will specialize in and export LCD TVs.
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. (Scenario: Chile and the United States) According to the Heckscher-Ohlin model:
Chilean workers should support U.S.-Chile free trade.
Suppose that the United States and China each produce steel and cloth. In the Heckscher-Ohlin model, if the United States enjoys a comparative advantage in steel production, then:
China must have a comparative advantage in cloth production.
(Table: Factor Use in Trade) The information given in the table was for a country with abundant labor, hence it violates the HO model.
False
According to the HO theorem, a country will export only those commodities that use its scarce factors.
False
According to the Heckscher-Ohlin model, differences in technology across countries are a major cause of international trade.
False
During the 1990s, U.S. agricultural net exports were approximately zero.
False
In the Heckscher-Ohlin model labor cannot move across countries, but capital is mobile internationally.
False
Taking part in free trade benefits everybody.
False
The Heckscher-Ohlin model is a long-run model in which labor, capital, and other resources can move freely between industries and across countries.
False
The increased R&D spending in China should lower their effective R&D scientist abundance.
False
Using U.S. data for 1947, Leontief found that U.S. exports were more capital intensive and less labor intensive than U.S. imports. This was a paradoxical finding because the United States was abundant in capital.
False
With two goods, two factors, and two countries, the Heckscher-Ohlin model predicts that a country will export the good that uses its intensive factor abundantly and import the other good.
False
(Figure: Home and Foreign Autarky Equilibria) According to the diagram, which nation has a higher no-trade equilibrium relative price for computers (in terms of shoes)?
Foreign
(Figure: Home and Foreign Autarky Equilibria) If shoes are a labor-intensive industry, which nation has more labor resources?
Foreign
Suppose that there are two countries, Home and Foreign, each of which produces two goods, computers and shoes, using two factors of production, labor and capital. Which of the following is not an assumption of the HO model for this situation?
Foreign is capital abundant and Home is labor abundant.
(Figure: Home and Foreign Autarky Equilibria) According to the shapes of the two PPFs, which nation has a comparative advantage in the production of computers?
Home
Suppose that the price of shoes (which are labor intensive) has risen by 10%. Then which of the following can you say for sure about Home?
Home wages will rise by more than 10%.
Suppose that the price of shoes (which are labor intensive) has risen by 5%. Then which of the following can you say for sure about home?
Home wages will rise by more than 5%.
Assume that Home is relatively abundant in labor and relatively scarce in land. The Heckscher-Ohlin model predicts that trade with other countries will cause increased returns to:
Home's labor.
Which of the following countries has the most illiterate labor?
India
If a country is exporting computers, which are capital intensive, what will happen to the rental rate on capital?
It will increase.
Which of the following is not an assumption that the Heckscher-Ohlin model makes?
Labor and capital move between countries.
(Table: Factor Use in Latvian Trade) According to the Heckscher-Ohlin model, Latvia's capital/labor ratios are consistent with:
Latvia being a labor-abundant country.
What was "paradoxical" about Leontief's factor-proportions study of U.S. trade?
Leontief concluded that U.S. imports were more capital intensive than U.S. exports.
Explanations of Leontief's paradox include all but the following:
Leontief ignored the fact that the United States imports a variety of products instead of just one.
Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000 workers and 700 units of capital. Technology is identical in both countries. Assume that wine is the capital-intensive good and cloth is the labor- intensive good. Which of the following statements is correct?
Portugal will export wine and import cloth.
Compared with other countries, the United States' effective factor endowment is greatest for:
R&D scientists.
Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000 workers and 700 units of capital. Technology is identical in both countries. Assume that wine is the capital-intensive good and cloth is the labor- intensive good. Which of the following statements is correct if the nations start trading with each other?
Rental rates in Portugal will increase.
Based on the HO model, what is the result on the real returns to factors of production?
Resources used intensively in export industries (such as labor in China and capital in the United States) will see an increase in their returns, whereas the resources used intensively in import-competing industries will see a decline in their return.
(Figure: A Country's Before and After Trade Equilibria) What happened to the relative price of shoes in this nation after trade?
Shoes became relatively cheaper in terms of computers.
Feenstra and Taylor describe the "magnification effect" of trade. This effect describes how:
Small changes in relative prices as a result of trade lead to larger long-run changes in the real wage or rental of factors.
(Table: Data on Suburbia) Which statement below is correct?
Suburbia is a labor-abundant country.
Which statement below is correct?
The HO model assumes that all resources can freely move between industries.
There are many real-life examples of factor-intensity differences across the same industries in different nations. How does the Heckscher-Ohlin model handle this?
The HO model assumes that each industry has the same factor intensity in every nation because it enables the model to predict trade based on other factors.
Which statement is true?
The Heckscher-Ohlin model offers a good explanation of the pattern of trade and the gains from trade.
(Table: Data on Suburbia) Which statement is true concerning the change in the marginal product of labor as Suburbia moved from autarky to a free-trade situation?
The MPL in good X and good Y production both rose
Which statement is true?
The Ricardian trade model offers an explanation of the gains from trade.
Which of the following is not an explanation of Leontief's paradox?
The United States always got preferential treatment from its trading partners.
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. (Scenario: Chile and the United States) According to the Heckscher-Ohlin model:
The United States should export automobiles to Chile.
Consider two products, automobiles and shoes. If shoes are labor intensive and automobiles are capital intensive, what will happen under the HO model?
The capital-abundant country will import shoes.
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. (Scenario: Chile and the United States) Which statement below is correct?
The capital/labor ratio used in the production of automobiles is higher than the capital/labor ratio used in the production of wheat.
Canada and the United States produce computers and chemicals using labor and capital as the only inputs in production. The United States is capital abundant, and Canada is labor abundant. Computer production is more labor intensive than chemical production in both countries. (Scenario: Canada and the United States) What does the Heckscher-Ohlin model predict will happen to prices of computers or chemicals in the two countries?
The price of chemicals should rise in the United States.
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in capital, and Italy is relatively abundant in labor. (Scenario: France and Italy) Which statement below is correct?
The ratio of Italy's total capital stock to its labor force is smaller than the same ratio for France.
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. (Scenario: Chile and the United States) Which statement below is correct?
The ratio of the United States total capital stock to its labor force is higher than the same ratio for Chile.
Consider two products, automobiles and shoes. If shoes are labor intensive and automobiles are capital intensive, what can we expect in free-trade conditions?
The relative price of shoes in the shoe-exporting country will increase.
After controlling for productivity differences, the sign test confirms the findings of the Heckscher-Ohlin model.
True
In the Heckscher-Ohlin model, countries trade because the available resources (labor, capital, and land) differ across countries.
True
One commonly accepted explanation of the Leontief paradox is that the United States is abundant in skilled labor.
True
The Heckscher-Ohlin model cannot explain trade patterns among countries with similar labor productivities and similar wages such as the United States and Switzerland.
True
The Heckscher-Ohlin theory and the Stolper-Samuelson theorem together lead to the conclusion that that a country's abundant factor gains and its scarce factor loses from international trade.
True
The Stolper-Samuelson theorem indicates that an increase in the relative price of a good will cause the real earnings of labor and capital to move in opposite directions.
True
The Stolper-Samuelson theorem states that with trade, the abundant factor benefits and the scarce factor loses.
True
With two goods, two factors, and two countries, the Heckscher-Ohlin model predicts that a country will export the good that uses its abundant factor intensively and import the other good.
True
Leontief found that:
U.S. exports were labor intensive compared with its import-competing production.
The Leontief paradox found that:
U.S. exports were labor intensive.
Which of the following groups will NOT gain if China and the United States engage in completely free trade?
U.S. unskilled labor
Leontief's study of U.S. post-World War II trade concluded that the:
United States exported labor-intensive goods
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. (Scenario: Chile and the United States) What is the most important reason why U.S. workers might oppose U.S.-Chile free trade?
Wages in the United States are expected to fall as a result of U.S.-Chile free trade.
Canada and the United States produce computers and chemicals using labor and capital as the only inputs in production. The United States is capital abundant, and Canada is labor abundant. Computer production is more labor intensive than chemical production in both countries. (Scenario: Canada and the United States) What does the Heckscher-Ohlin model predict will happen to wages and returns to capital after trade takes place between Canada and the United States?
Wages of Canadian workers should rise.
Suppose that country 1 is capital abundant relative to country 2. Both produce two goods (X and Y). Factor-intensity reversal occurs whenever:
X is capital intensive in country 1 and labor intensive in country 2.
The HO model predicts that firms will increase production of the item exported and hire more resources. A resulting prediction is that the resources used in the item imported will experience:
a decline in demand and a decline in the relative wage (rental price).
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in capital, and Italy is relatively abundant in labor. (Scenario: France and Italy) According to the HO model, free trade between Italy and France should cause:
a decrease in the Italian price of bread and a decrease in the French price of wine.
A situation in which one nation produces good A using labor more intensively (relative to capital) and a second nation, producing the same good A, uses capital more intensively (relative to labor) is called:
a reversal of factor intensities.
The Heckscher-Ohlin (HO) theorem explains patterns of trade between countries using:
abundance of scarcity of resources
If a nation has a higher share of the factor than its share of world GDP, we say that the factor is:
abundant
The paradox of India's importation of cotton textiles in the early twentieth century may also be explained by:
accounting for wide differences in labor productivity using effective factor endowments.
Country X's effective factor endowment is defined as its:
actual factor endowment times factor productivity.
The HO model predicts that firms will increase production of the item exported and hire more resources. Therefore the factor of production used more intensely in the production of exports will experience:
an increase in demand and an increase in the relative wage (rental price).
(Table: Capital Intensity Across Industries) Which industry is the most labor intensive?
apparel
(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual employee compensation (including fringe benefits) for 1990 in several U.S. industries. China and India are labor abundant relative to the United States. According to the HO model, which U.S. industries were most likely to face the strongest competition from Chinese and Indian imports in 1990?
apparel and clothing, leather and leather products, textiles and textile products
Wages generally:
are lower in labor-abundant countries than in capital-abundant countries.
The Heckscher-Ohlin model assumes that production techniques within a nation use the factors of production:
at different intensities for each industry, so that one is more or less intensive in that factor than the other.
If Japanese workers receive lower wages in the production of autos compared with American workers, then:
auto production costs could be lower in the United States if U.S. labor productivity is higher than Japanese labor productivity.
It may be unrealistic to assume that consumer tastes are the same across nations and invariant with respect to income:
but it is an HO assumption because it enables the analysis to focus on other issues that drive trade and prices.
(Table: Factor Use in Latvian Trade) Does Latvia import capital- or labor-intensive products?
capital intensive
In the United States, agriculture is considered to be ________ , in comparison to agriculture in China.
capital intensive
The PPF is bowed out in the Heckscher-Ohlin model because:
capital is better suited to computer production than shoe production.
Using 1947 data, Leontief discovered a "paradox" in his test. If the Heckscher-Ohlin model is correct, the United States would have exported _____-intensive goods and imported _____- intensive goods; but his study indicated the reverse was true.
capital; labor
(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual employee compensation (including fringe benefits) for 1990 in several U.S. industries. The U.S. aggregate (total) capital/labor ratio was $34,705 worker in 1990. The aggregate (total) capital/labor ratios in Finland, Germany, and Norway ranged between $45,000 and $50,000 per worker in 1990. According to the factor proportions theory, which U.S. industries were most likely to face strong competition from Finland, Germany, and Norway during the 1990s?
chemical products, industrial machinery and equipment, instruments and related products
Hong Kong is relatively abundant in labor, whereas Canada is relatively abundant in capital. In both countries, shirt production is relatively more labor intensive than computer production. According to the Heckscher-Ohlin model, Hong Kong will have a(n) ________ advantage in the production of __________ .
comparative; shirts
The Heckscher-Ohlin Model assumes that:
consumer tastes and technologies are the same across countries.
In a labor-abundant country, free trade will cause a(n) __________ in the rental of capital and a(n) _________ in the marginal product of capital.
decrease; decrease
Leontief suggested that his results were not a paradox once we account for:
differences in productivity of factors.
The Heckscher-Ohlin model assumes that factors of production can move freely _______ , but cannot move _______.
domestically; internationally
The Heckscher-Ohlin model assumes that the factors of production are mobile ______, but immobile _____.
domestically; internationally
(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the relative price of computers from the pretrade position, the price line will slide ______ on the diagram and show the new production point in the domestic economy.
down to the right
The sign test compares a country's:
effective factor endowment with its share of world GDP.
The Stolper-Samuelson theorem suggests that, over time, free international trade should lead to:
equalization of real wages across the world.
If there are only two nations, one nation's exports are the other's imports; which of the following is identical for both nations?
equilibrium relative price, trade triangle, and opportunity cost
The Heckscher-Ohlin model of international trade uses _____ and ______ to explain trade patterns.
factor abundance; factor intensity
In a capital-intensive industry, the capital/labor ratio will:
fall as the wage/rental ratio falls.
Tests of the extended Heckscher-Ohlin model:
find mixed evidence depending on the years and methods used.
The Heckscher-Ohlin model offers an explanation of the:
gains from international trade, the pattern of international trade, and the effects of international trade on returns to mobile resources.
The sign test states that an abundant factor used in a country's exports should:
have a positive sign.
Compared with the rest of the world, the United States is least abundant in:
illiterate labor.
In a capital-abundant country, free trade will cause a(n) __________ in the rental of capital and a(n) ____________ in the marginal product of capital.
increase; increase
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in capital, and Italy is relatively abundant in labor. (Scenario: France and Italy) According to the HO model, free trade between France and Italy should result in:
increased returns to capital in France and increased wages in Italy.
Most trading nations do not completely specialize. Incomplete specialization is mainly due to:
increasing opportunity costs.
The Heckscher-Ohlin model assumes that technology in each industry:
is the same for each nation—each firm has access to the most profitable technology.
The implication of resources being mobile domestically is that:
labor and capital are paid the same wage and rental price in all domestic industries.
Suppose that Home has 20% of the world's capital, 10% of the world's skilled labor, and 30% of the world's unskilled labor and produces 20% of the world's GDP. This information suggests that Home is:
less-skilled-labor abundant.
To determine whether a nation has an "abundance" of a resource, economists:
look at a nation's share of the factor compared with its share of world GDP.
(Table: Capital Intensity Across Industries) Suppose that the United States is labor abundant relative to Canada. Which of the following products is the United States most likely to import from Canada?
paper and allied products
After accounting for differing _________ as well as _________, evidence is broadly consistent with the Heckscher-Ohlin model.
productivities; endowments
(Table: Data on Suburbia) Did the capital-labor ratio used in the production of good X rise, fall, or remain unchanged as Suburbia moved from autarky to free trade?
rise
If Home is capital abundant, then when it begins to freely trade with the rest of the world, the return to capital in Home should _________ and the real wage in Home should _______.
rise, fall
With the "opening" of trade, the item exported experiences a ________ in demand and therefore a ________ in its relative (domestic) price, whereas the item imported experiences a(n) ________ in demand and therefore a(n) ________ in its relative (domestic) price.
rise, rise; decrease, decrease
Compared with the rest of the world, the United States is most abundant in:
skilled labor.
The Leontief paradox questioned the validity of:
the Heckscher-Ohlin model.
The conclusion that a labor-abundant country exports the good using labor intensively in production and a capital- abundant country exports the good using capital intensively in production is known as:
the Heckscher-Ohlin theorem.
A long-run model of trade basic to the determination of how mobile factors of production affect national welfare and the returns to the factors is known as:
the Heckscher-Olin model.
In the long run, when factors are mobile, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good. This is known as:
the Stolper-Samuelson theorem.
The conclusion that international trade will lead to an increase in real earnings of a country's abundant resource is known as:
the Stolper-Samuelson theorem.
Leontief found that the HO model did not work for the United States because:
the U.S. capital/labor ratio for imported goods was larger than that for the exported goods.
Which of the following countries has the most R&D scientists?
the United States
Which of the following countries has the most physical capital?
the United States
Economist Wassily Leontief tested the Heckscher-Ohlin model to determine whether or not it correctly predicted the capital and labor content of imports and exports of:
the United States.
If we measure scarcity or abundance correctly, we should use the concept of "effective factor endowment." This means:
the actual factor endowment multiplied by the average productivity of workers compared with its share of world GDP.
Identical technologies are a more reasonable assumption for:
the call center industry.
The wage paid to labor should increase when:
the capital/labor ratio increases.
(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the relative price of computers from the pretrade position, the price line will slide down to the right on the diagram and show the new production point in the domestic economy. We will get the number of computers that producers will produce at each price. If we subtract the number of computers purchased domestically at those same prices, we will get ____________ for computers.
the export supply schedule
(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the relative price of computers from the pretrade position, the price line will slide down to the right on the diagram and show the new production point in the domestic economy. We can compute how many shoes will be purchased as the price of shoes decreases relative to computers. If we subtract domestic production at those prices, we will have ____________ for shoes.
the import demand schedule
The international equilibrium price (or world price) and quantity for a traded item is determined by:
the intersection of the export supply schedule and the import demand schedule.
As trade takes place, imports will force firms to decrease price and production and lay off resources, which will be absorbed by the other industry at a lower wage (rental price). The result is that:
the lower wage makes it possible for both industries to hire more of the resource, and therefore the ratio of that resource to the other rises in both industries.
Suppose that Home is a labor-abundant country. When trade occurs with Foreign, a capital-abundant country, the HO model predicts that:
the price of the labor-intensive good will rise in Home.
A problem with measuring the factor shares to determine scarcity or abundance is that:
the quantity of a factor may not be as important as its productivity.
Measuring the "factor content" of exports and imports helps determine:
the shares of factors of production used to produce exports and implicitly imports.
Using a new procedure, economists can test the HO hypothesis and determine whether or not a nation's exports reflect its abundant factor. This is:
the sign test—taking the difference of the effective factor share and the share of world GDP to determine whether it is positive or negative compared with the sign of its factor content of net exports.
Nike shoes can be produced at low cost in foreign countries because:
their labor cost is lower than the home country.
The Heckscher-Ohlin model simplifies the analysis by assuming:
there are only two nations, with two possible goods and two factors of production.
If agriculture is a capital-intensive industry in the United States and a labor-intensive industry in India, then:
there is factor-intensity reversal in agricultural production between the two countries.
Surveys have found that _____________ are the strongest proponents of placing limits on imports.
unskilled workers
Which of the following groups is least likely to favor free trade?
unskilled workers
The PPF of a country will be skewed toward the good that:
uses its abundant factor intensively.
Suppose that all countries eliminate their barriers to trade. The Heckscher-Ohlin model predicts that:
wages should become more equal throughout the world.
According to the Heckscher-Ohlin model, international trade for a nation with a relative abundance of skilled labor and a relative scarcity of unskilled labor will tend to:
widen or aggravate the income disparity between skilled and unskilled workers.
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in capital, and Italy is relatively abundant in labor. (Scenario: France and Italy) According to the HO model, what product will Italy export?
wine
The assumptions that limit the HO model result in the Heckscher-Ohlin theorem, which states that:
with two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good.
