ECN 340 Solution_to_Ch4_Q1_Q6_Q8_Q10_Q11

ECN 340 Solution_to_Ch4_Q1_Q6_Q8_Q10_Q11 - Trade and...

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Unformatted text preview: Trade and Resources: The Heckscher-Ohlin Model 1. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Con- sider the production of hand-made rugs and assembly line robots in Canada and India. a. Which country would you expect to be relatively labor-abundant, and which capital-abundant? Why? Answer Given Canada’s relatively small population ( , 30 million compared with more than 1 billion in India) and level of development, it is a safe assumption that L CAN / K CAN , L IND / K IND . That is, there is more capital per worker in Canada, making it capital-abundant compared with India. Similarly, India would be labor- abundant. b. Which industry would you expect to be relatively labor-intensive, and which is capital-intensive? Why? Answer: Given the amount of capital required to produce robots and the amount of labor required to produce rugs, one would expect that L ROBOT / K ROBOT , L RUG / K RUG , making robots capital intensive and rugs labor intensive. c. Given your answers to (a) and (b), draw production possibilities frontiers for each country.Assuming that consumer preferences are the same in both countries, add indifference curves and relative price lines (without trade) to your PPF graphs. What do the slopes of the price lines tell you about the direction of trade? S-29 4 Answer: See the following figures. Canada’s no-trade production and consumption of robots and rugs corresponds to a relative price of robots that is lower than that in India.This is shown by the flatter sloped relative price line in Canada. d. Allowing for trade between countries, redraw the graphs and include a “trade tri- angle” for each country. Identify and label the vertical and horizontal sides of the triangles as either imports or exports. Answer: See the following figures. 2. Leontief’s Paradox is an example of testing a trade model using actual data observa- tions. If Leontief had observed that the amount of labor needed per $1 million of U.S. exports was 100 instead of 182, would he have reached the same conclusion? Explain. Answer: If the amount of labor required for $1 million of U.S. exports was 100 person-years instead of 182, then the capital/labor ratio for exports would have been $25,500 per person. Because this is larger than the corresponding ratio for imports, this test would have provided support for the Heckscher-Ohlin theorem.That is, the United States (which was assumed to be capital-abundant in both cases) would have been shown to export capital-intensive goods. In actuality, however, Leontief’s test showed exactly the opposite. S-30 Solutions ■ Chapter 4 Trade and Resources: The Heckscher-Ohlin Model Output of robots, Q RO * Output of robots, Q RO (b) India (a) Canada O u t p u t o f r u g s , Q R U * O u t p u t o f r u g s , Q R U A A* Output of robots, Q RO * Output of robots, Q RO O u t p u t o f r u g s , Q R U * O u t p u t o f r u g s , Q R U A A * Imports Imports Exports Exports 6. Suppose when Russia opens to trade, it imports automobiles, a capital-intensive good.Suppose when Russia opens to trade, it imports automobiles, a capital-intensive good....
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This note was uploaded on 02/09/2012 for the course ECN 340 taught by Professor Luchang during the Fall '11 term at Michigan State University.

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ECN 340 Solution_to_Ch4_Q1_Q6_Q8_Q10_Q11 - Trade and...

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