3 in the ho model with fixed world prices if capital

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Unformatted text preview: and the return to capital will rise. ANSWER: False. Since factor intensities do not change in either industry, neither do the returns to labor or capital. This follows from the Factor Price Insensitivity theorem – Changes in the amount of a factor can be absorbed by changing outputs of the industries, without any change in the factor prices. 3. In the HO model with fixed world prices, if capital inflows increase the capital stock in the Foreign country, they will increase the capital labor ratio employed in airplane production. ANSWER: False. The decrease in production of bicycles allows for the capital labor ratio to remain unchanged in both industries, since the factor intensities do not change with the any change in the factor endowment. ECON370 Fall 2013 International Trade Professor Soderbery Short Answer Describe Leontief’s findings in 1954. Explain why his results were considered a paradox, and how we have overcome his results. ANSWER: Leontief found that the capital- labor ratio for U.S. imports was higher than the capital- labor ratio for U.S. exports. According to H- O model, since U.S. is abundant in capital, it is supposed to export capital- intensive goods and import labor- intensive goods. In other words, capital- labor ratio should be higher in U.S. exports. Therefore, Leontief’s finding was a paradox. Economists offered several explanations to the paradox, such as: • • • • • • U.S. and foreign technologies are not the same...
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