1. Which of the following is NOT an assumption of the Hechscher-Ohlin model?
   1. Markets are competitive.
   2. Technology is the same across countries.
   3. The supply of factors of production grows over time.
   4. Factors of production can be used in different industries.
2. If Country A is defined as "relatively capital-abundant" in relation to Country B by the "price" definition of factor abundance, then the price of labor relative to the price of capital is? ? in Country A than in Country B, and the Heckscher-Ohlin theorem would suggest that Country A would export relatively? ? goods to Country B.
   1. higher; capital-intensive
   2. higher; labor-intensive
   3. lower; capital-intensive
   4. lower; labor-intensive

3. Suppose that there are two factors, land and capital, and that the US is relatively capital abundant while Mexico is relatively land abundant. According to the H-O theory,? ?

1. Mexican landowners should support Mexican-US free trade.
2. Mexican capitalists should oppose Mexican-US free trade.
3. US capitalists should support Mexican-US free trade.
4. all of the above.
5. What is the main difference between the Hechscher-Ohlin model and the Ricardian model? ? ?
6. Unlike in the Ricardian model, endowments of factors of production affect trade patterns in the Hechscher-Ohlin model.
7. Unlike in the Ricardian model, factors are mobile across industries in the HecbscherOhlin model.
8. Unlike in the Ricardian model, trade is not assumed to be free in the Hechscher-Ohlin model.
9. Unlike in the Ricardian model, all factors of production gain as a result of trade in the Hechscher-Ohlin model.

5. What does the Hechscher-Ohlin model predict about the pattern of trade?

1. Each country sells abundant factors of production.
2. The pattern of trade depends on the size of the economy.
3. Each country specializes in the production of goods that use available technology efficiently.
4. Each country specializes in the production of goods that use its abundant factors intensively.

6. If relatively capital abundant Country A opens trade with relatively labor abundant Country B and the trade takes place in accordance with the Heckscher-Ohlin theorem, what would be the consequence for factor prices (w/r) in the two countries? ? ?

1. (w/r) rises in A and falls in B.
2. (w/r) rises in A and also rises in B.
3. (w/r) falls in A and rises in B.
4. (w/r) falls in A and also falls in B.

7. The Hechscher-Ohlin model predicts that prices of factors of production equalize across countries. But we do not observe factor price equalization principally because? ?

1. the Hechscher-Ohlin model is not useful.
2. prices of goods are inconsistently measured across countries.
3. there are differences in technology across countries that the Hechscher-Ohlin model ignores.
4. there are non-tradable goods that the Hechscher-Ohlin model does not account for.

8. The Stopler-Samuelson theorem suggests that, when a country is opened to international trade, the relative price of the country's abundant factor of production will? ? and the relative price of the country's scarce factor of production will? ?

1. rise: also rise.
2. rise; fall.
3. fall; rise.
4. fall; rise.

9. The Leontief paradox states that? ?

1. owners of abundant factor do not gain from trade.
2. US exports are less capital-intensive than US imports.
3. prices of factors of production are not equalized across countries.
4. countries export goods that use available technology inefficiently.

10. If demand reversal is the explanation of the Leontief paradox, this would imply that the demand by the United States for labor-intensive goods is relatively

and therefore, that US wages would be relatively in comparison to wages in US trading partners. ? ?

1. low; low
2. low; high
3. high; low
4. high; high

11. If a commodity is classified as "labor-intensive" at one set relative factor price but "capital-intensive" at another set of relative factor price, this situation is known as? ?

1. demand reversal
2. factor-intensity reversal.
3. balance-of-payment reversal.
4. factor price reversal.

12. Suppose that we are in a two-factor, two-country world where the factors of production are labor (L) and land (T), the returns to the factors are the wage rate (w) and the rental rate on land (t), and the countries are Country A and Country B. In this situation, Country A is land-abundant relative to Country B by the physical definition of relative factor abundance if? ?, and Country A is Land-abundant relative to Country B by the price (or economic) definition of relative factor abundance if? ?

1. (L/T)_A B; (w/t)_A >(w/t)_B.
2. (L/T)_A B; (w/t)_A B.
3. (L/T)_A > (L/T)_B; (w/t)_A >(w/t)_B.
4. (L/T)_A > (L/T)_B; (w/t)_A B.
5. According to Rybczynski theorem, an increase in a country's endowment of a factor will cause? ? in output of the good that uses that factor intensively and? ? in the output of the other good.
6. an increase; an increase
7. a decrease; a decrease
8. a decrease; an increase
9. an increase; a decrease

Empirics & Discussion

1. Are Factor Intensities the Same Across Countries?

One of our assumptions for the Heckscher-Ohlin (HO) model is that the same good (shoes) is labor-intensive in both countries. Specifically,we assume that in both countries, shoe production has a higher labor-capital ratio than does computer production. Although it might seem obvious that this assumption holds for shoes and computers, it is not so obvious when comparing other products, say, shoes and call centers.

In principle, all countries have access to the same technologies for making footwear. In practice, however, the machines used in the United States are different from those used in Asia and elsewhere. While much of the footwear in the world is produced in developing nations, the United States retains a small number of shoe factories. New Balance, which manufactures sneakers, has five plants in the New England states, and 25% of the shoes it sells in North America are produced in the United States. One of their plants is in Norridgewock, Maine, where employees operate computerized equipment that allows one person to do the work of six. This is a far cry from the plants in Asia that produce shoes for Nike, Reebok, and other U.S. producers. Because Asian plants use older technology (such as individual sewing machines), they use more workers to operate less productive machines.

In call centers, on the other hand, technologies (and, therefore, factor intensities) are similar across countries. Each employee works with a telephone and a personal computer, so call centers in the United States and India are similar in terms of the amount of capital per worker that they require. The telephone and personal computer, costing several thousand dollars, are much less expensive than the automated manufacturing machines in the New Balance plant in the United States, which cost tens or hundreds of thousands of dollars. So the manufacture of footwear in the New Balance plant is capital-intensive as compared with a U.S. call center. In India, by contrast, the sewing machine used to produce footwear is cheaper than the computer used in the call center. So footwear production in India is labor-intensive as compared with the call center, which is the opposite of what holds in the United States.

Discussion:

What does the above case illustrate? How does it help you to explain the Leontief paradox?

When classifying labor-intensive, capital intensive or technology intensive goods, what do we need to pay attention to?

1. Does Heckscher-Ohlin theorem hold in all industries?

The following are data on U.S. exports and imports in 2012 at the two-digit Harmonized Tariff Schedule (HTS) level. Which products do you think support the Heckscher-Ohlin theorem? Which products are inconsistent?

Export Import HTS Level Product ($ billions) ($ billions) 22 Beverages 6.4 19.2 30 Pharmaceutical products 38.0 64.1 52 Cotton 8.2 1.1 61 Apparel 1.4 41.1 64 Footwear 0.8 23.7 72 Iron and steel 22.0 29.0 74 Copper 9.3 10.2 85 Electric machinery 105.0 289.0 87 Vehicles 122.3 240.0 88 Aircraft 95.8 24.2 94 Furniture 8.7 44.3 95 Toys 4.4 27.0 Source: International Trade Administration, U.S. Department of Commerce