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HW_4 AK - ECON370 Fall 2013 International Trade Professor...

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ECON370 Fall 2013 International Trade Professor Soderbery Homework 4 ANSWER’KEY ’ Answer True, False or Uncertain, and briefly explain why. For all questions regarding the Heckscher-Ohlin (HO) model assume the following: there are two countries, Home and Foreign, abundant in capital and labor respectively. There are two goods (airplanes and bicycles) which are produced by two factors of production. Further, assume airplane production is capital intensive and bicycle production is labor intensive. Assume both countries produce both goods. 1. In the HO model with fixed world prices, if immigration increases the labor force in the Home country, the Home country will decrease its production of airplanes. ANSWER: ’ True.’The’decrease’in’airplane’production,’ capital-intensive’industry,’follows’ directly’from’the’Rybczynski ’ theorem.’ Rybczynski’Theorem:’An’increase’in’the’amount’of’a’ factor’will’increase’the’output’of’the’industry’using’that’factor’intensively’and’decrease’the’ output’of’the’other’industry.’Here,’labor’force’increase,’so’that’the’output’of’labor -intensive’ goods’(bicycle)’increases,’while’the’production’of’capital -intensive’goods’(airplane)’shrinks. 2. In the HO model with fixed world prices, if immigration increases the labor force in the Home country, wages will fall 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’output s’ 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.
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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.
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