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# ch4_stu_word - Chapter 4 Trade and Resources The...

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Chapter 4 Trade and Resources: The Heckscher-Ohlin Model 41 Heckscher-Ohlin Model 42 Effects of trade on factor prices 43 Determination of real wage and real rental 44 General Equation for the Long-run change in factor price Introduction: h The Heckscher-Ohlin model (HO) shows how trade occurs because countries that have ___________________. h They wanted to explain this increase in trade during the “golden age” of international trade. h H-O assumed that ________________________ across countries, but had an uneven distribution of resources. h The specific factors model in the last chapter ________________ since capital and labor could not move between industries. h The HO model is ____________ because all factors of production can move between the industries. 42 Heckscher-Ohlin Model 1. Assumptions of the model: Two countries: Home and Foreign Two factors: capital(K) and labor(L) Two goods: computers and shoes K c , K s –capital used in computers and shoes L c , L s – labor used in computers and shoes A1 : Both factors can _Move freely__ between the industries Rental on capital, R, is same across two industries. Wage earned by labor, W, is same across two industries.

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A2 : Shoe industry is __________. It required more labor per unit of capital to produce shoes than computers. Computer industry is __________, requiring more capital per worker than the production of shoes. Figure 4.1: Relative demand curves for labor in each industry A3 : Foreign is labor abundant. ____________ labor/capital ratio in Foreign exceeds that in Home. Home is capital abundant, ____________. The resources distribute unevenly across the two countries. A4 : The _final goods_______, shoes and computers, can be traded internationally, but _labor and capital__ do not move between countries. A5 : The __________________ used to produce the two goods are identical across the countries. A6 : _______________ are the same across countries. Preferences for both goods do not vary with a country’s level of income. Application : factor intensity reversals (PPT) In the HO model, we will ignore the possibility of “factor intensity reversals.”

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PPF: Home- bow out, biased toward ______________ (on the horizontal axis), because Home is capital-abundant and production of computer is capital intensive. Foreign-bow out, biased toward _______ (on the vertical axis), because shoe production is labor intensive and Foreign is labor abundant. Indifference Curve: Assumption of common consumer tastes across the countries: => __identical_____ indifference curve to each country’s PPF. The shape of the indifference curves is the same in each country. The tangencies with the two countries’ PPFs are different because of the different shapes of the PPFs. Figure 4.2 No-trade equilibria in Home and Foreign

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ch4_stu_word - Chapter 4 Trade and Resources The...

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