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Chap008EndofChapterproblems

# Chap008EndofChapterproblems - Chapter 08 The Basis for...

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Chapter 08 - The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model CHAPTER 8 THE BASIS FOR TRADE: Factor Endowments and the Heckscher-Ohlin Model Answers to End-of-Chapter Questions and Problems 1. The physical definition of factor abundance is based on the relative physical amounts of the factors present in the country, e.g., the difference in the capital/labor ratios. The country whose K/L ratio is the largest is defined to be the capital-abundant country. The price definition is based on relative prices of the factors rather than on measurements of their presence in the country. It is hypothesized that the relatively-abundant factor in a country should be relatively cheaper compared to a second country. Thus, according to this definition, if the ratio of the price of capital to the price of labor is lower in one country (A) compared to a second country (B), country A is said to be the capital-abundant country. Under the assumptions of H-O, the two definitions should give the same result. However, if tastes differ between the two countries, then factor prices will not only reflect different supply conditions but also different demand conditions. In this instance the price definition and the physical definition could give conflicting conclusions about relative factor abundance. For example, if consumers in a physically capital-abundant country strongly prefer the capital-intensive product, this would bid up the price of the capital-intensive good and hence would bid up the price of capital. Therefore, other things equal, w/r would fall and could become lower than in the second country. Hence, the physically capital-abundant country could become labor abundant by the price definition. 2. According to the H-O theorem, countries should specialize in and export the product that uses relatively intensively the relatively-abundant factor. Therefore, Belgium should export capital-intensive goods to France because, by the physical definition, Belgium is the capital- abundant country. 3. The wages in the capital-abundant country should fall and the wages in the labor- abundant country should rise with trade according to the factor price equalization theorem. Therefore, French wages should fall. 4. Assuming that the owners of capital are worried that the distribution of income will turn against them with trade, one concludes that the country in question must be a labor-abundant country. This follows from the Stolper-Samuelson theorem, which indicates that international trade will increase the real income of the owners of the abundant factor and lower the real income of the owners of the scarce factor.

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Chap008EndofChapterproblems - Chapter 08 The Basis for...

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