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Name TestBanks Chapter 4: Trade and Resources: The Heckscher-Ohlin Model

Description Question pool for TestBanks Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Instructions

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Question
Which statement is true?
Answer The Heckscher-Ohlin model offers a good explanation of the pattern of trade and the gains from trade.
The Heckscher-Ohlin trade model does not offer an explanation of the pattern of trade.
The Heckscher-Ohlin trade model does not offer an explanation of the gains from trade.
The Ricardian trade model (with labor as the only input) offers a good explanation of the pattern of trade
and the gains from trade.

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A long-run model of trade basic to the determination of how mobile factors of production affect national welfare and the
returns to the factors is known as:
Answer the specific-factors model.
the Ricardian model.
the Chicago model of trade.
the Heckscher-Ohlin model.

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The Heckscher-Ohlin model of international trade uses _____ and ______ to explain trade patterns.
Answer comparative; absolute advantage
factor abundance; factor intensity
factor availability; factor usability
tariffs; quotas

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The Heckscher-Ohlin (HO) theorem explains patterns of trade between countries using:
Answer economies of scale.
monopoly power in the industry.
abundance or scarcity of resources.
tariffs and quota.

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Which statement is true?
Answer The Ricardian model offers a good explanation of the pattern of trade and the gains from trade.
The Ricardian trade model offers an explanation of the pattern of trade.
The Ricardian trade model offers an explanation of the gains from trade.
The Ricardian trade model (with labor as the only input) does not offer a good explanation of the pattern of
trade or the gains from trade.

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The Heckscher-Ohlin model simplifies the analysis by assuming:
Answer there is unemployment of workers in the home country.
there are a variety of levels of workers and types of capital.
land is an important factor of production.
there are only two nations, with two possible goods and two factors of production.

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Which statement below is correct?
Answer The HO model assumes that all resources can freely move between industries.
The specific-factors model assumes that all resources can freely move between industries.
Both the HO and the specific-factor models assume that all resources can freely move between industries.
Neither the HO nor the specific-factor model assumes that all resources can freely move between
industries.

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The Heckscher-Ohlin model assumes that factors of production can move freely _______ , but cannot move _______.
Answer domestically; internationally
after they are fully trained; before the training period is over
internationally; domestically
within unskilled occupations; into high-skill jobs

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The implication of resources being mobile domestically is that:
Answer there is often unemployment.
capital and land are often not suited for use in other industries.
labor and capital are paid the same wage and rental price in all domestic industries.
they lose the chance to become guest workers in other nations.

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The Heckscher-Ohlin model assumes that the factors of production are mobile ______, but immobile _____.
Answer in the short run; in the long run
in the long run; in the short run
domestically; internationally
internationally; domestically

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In a capital-intensive industry, the capital/labor ratio will:
Answer rise as the wage/rental ratio falls.
fall as the wage/rental ratio falls.
rise as the country's capital stock rises.
fall as the country's capital stock falls.

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Question
The Heckscher-Ohlin model assumes that production techniques within a nation use the factors of production:
Answer at different intensities depending on changing technology and which nation you are discussing.
at different intensities for each industry, so that one is more or less intensive in that factor than the other.
at the same intensity for each industry—for example, the ratio of capital to labor is the same for every
industry in the nation.
in no definite pattern.

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Question
Suppose that there are two countries, Home and Foreign, each of which produces two goods, computers and shoes,
using two factors of production, labor and capital. Which of the following is not an assumption of the HO model for this
situation?
Answer Both factors can move freely between sectors.
Foreign is capital abundant and Home is labor abundant.
There is free trade between the countries.
Shoe production is labor intensive.

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Which of the following is not an assumption that the Heckscher-Ohlin model makes?
Answer The quantity of capital and labor in two nations is different for each nation—so we have different
“endowments” of capital and labor.
The quantity of capital and labor in two nations is relatively abundant in one nation and relatively scarce in
the other.
The quantity of capital and labor in two nations is fixed in the short run.
Labor and capital move between countries.

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The Heckscher-Ohlin model assumes that technology in each industry:
Answer is the same for each nation—each firm has access to the most profitable technology.
has increasing returns so that one nation will be able to gain a comparative advantage by developing new
technology.
is very different across the world—some nations have access to technology, whereas others do not.
is hard to access because R&D is very expensive especially for low-income nations.

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The Heckscher-Ohlin Model assumes that:
Answer factor endowments are the same.
consumer tastes are the same across countries.
the technologies used to produce the two goods are identical across the countries.
consumer tastes and technologies are the same across countries.

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It may be unrealistic to assume that consumer tastes are the same across nations and invariant with respect to
income:
Answer so it is not one of the HO assumptions.
but it is an HO assumption because it enables the analysis to focus on other issues that drive trade and
prices.
but it actually is true so it is an HO assumption.
and it is not an HO assumption because consumer tastes within a nation are not relevant to international
trade.

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Question
Nike shoes can be produced at low cost in foreign countries because:
Answer they have superior technology.
they are strategic allies for the home country.
their labor cost is lower than the home country.
Nike has no competition in the home country.

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In the United States, agriculture is considered to be ________ , in comparison to agriculture in China.
Answer capital intensive
labor intensive
less subsidized
more restrictive

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The PPF is bowed out in the Heckscher-Ohlin model because:
Answer capital is specific to computer production.
labor is specific to shoe production.
capital is better suited to computer production than shoe production.
labor is specific to shoe production, capital is specific to computer production, and capital is better suited to
computer production than shoe production.

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Identical technologies are a more reasonable assumption for:
Answer the shoe industry.
the call center industry.
both the shoe and call center industries.
neither the shoe nor call center industries.

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A situation in which one nation produces good A using labor more intensively (relative to capital) and a second nation,
producing the same good A, uses capital more intensively (relative to labor) is called:
Answer a reversal of factor intensities.
a paradox of factor intensities
backward technology.
microintensity.

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Suppose that country 1 is capital abundant relative to country 2. Both produce two goods (X and Y). Factor-intensity
reversal occurs whenever:
Answer X is capital intensive in country 1 and labor intensive in country 2.
X is capital intensive in both countries.
Y is capital intensive in both countries.
X is capital intensive in country 1, and Y is labor intensive in country 2.

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Question
If agriculture is a capital-intensive industry in the United States and a labor-intensive industry in India, then:
Answer India should export agricultural goods to the United States.
neither country will have an advantage in agricultural production.
there is factor-intensity reversal in agricultural production between the two countries.
it is difficult to determine which country is labor abundant.

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There are many real-life examples of factor-intensity differences across the same industries in different nations. How
does the Heckscher-Ohlin model handle this?
Answer The HO model makes no assumptions about different factor intensities.
The HO model assumes that all firms require equal amounts of capital and labor just to be on the safe
side.
The HO model assumes that each industry has the same factor intensity in every nation because it
enables the model to predict trade based on other factors.
Actually, the factor-intensity reversal issue does not change the predictive value of the model.

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The PPF of a country will be skewed toward the good that:
Answer uses its scarce factor intensively.
uses its abundant factor intensively.
uses its intensive factor abundantly.
does not use its intensive factor abundantly.

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Figure: Home and Foreign Autarky Equilibria

Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) Which line above represents the Home relative price of computers in
terms of shoes?
Answer A
B
C
U

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Figure: Home and Foreign Autarky Equilibria

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Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) According to the shapes of the two PPFs, which nation has a
comparative advantage in the production of computers?
Answer Home
Foreign
not enough information to determine

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Figure: Home and Foreign Autarky Equilibria

Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) According to the diagram, which nation has a higher no-trade
equilibrium relative price for computers (in terms of shoes)?
Answer Home
Foreign
not enough information to determine

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Figure: Home and Foreign Autarky Equilibria

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Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) Which line above represents the Foreign relative price of computers in
terms of shoes?
Answer A
B
C
U

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Figure: Home and Foreign Autarky Equilibria

Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) At which point will the Home nation find its no-trade equilibrium
consumption and production point?
Answer A
B
C
U

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Figure: Home and Foreign Autarky Equilibria

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Reference: Ref 4-1

(Figure: Home and Foreign Autarky Equilibria) If shoes are a labor-intensive industry, which nation has more labor
resources?
Answer Home
Foreign
not enough information to determine

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Most trading nations do not completely specialize. Incomplete specialization is mainly due to:
Answer decreasing opportunity costs.
increasing opportunity costs.
constant opportunity costs.
perfectly substitutable resources.

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Wages generally:
Answer are higher in labor-abundant countries than in capital-abundant countries.
are lower in labor-abundant countries than in capital-abundant countries.
are the same in both labor-abundant and capital-abundant countries.
have no relationship to labor abundance.

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The international equilibrium price (or world price) and quantity for a traded item is determined by:
Answer the WTO.
the U.S. Department of Commerce.
the intersection of the export supply schedule and the import demand schedule.
trade negotiations conducted by representatives in the two nations.

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Consider two products, automobiles and shoes. If shoes are labor intensive and automobiles are capital intensive,
what can we expect in free-trade conditions?
Answer The relative price of automobiles in the auto-exporting country will decrease.
The relative price of shoes in the shoe-exporting country will increase.
More shoes will be produced by the capital-abundant country.
More automobiles will be produced by the labor-abundant country.

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Suppose that the United States and China each produce steel and cloth. In the Heckscher-Ohlin model, if the United
States enjoys a comparative advantage in steel production, then:
Answer China must have an absolute advantage in cloth production.
the United States will also have a comparative advantage in cloth production.
China must have a comparative advantage in cloth production.
the United States must have an absolute advantage in steel production.

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LCD TVs are capital intensive, and tennis rackets are labor intensive. Suppose Canada has $100 billion of capital and
2 million workers and Mexico has $10 billion of capital and 20 million workers. According to the HO model:
Answer Canada will specialize in and export LCD TVs.
Mexico will specialize in and export LCD TVs.
Canada will specialize in and export tennis rackets.
Mexico will import tennis rackets.

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Hong Kong is relatively abundant in labor, whereas Canada is relatively abundant in capital. In both countries, shirt
production is relatively more labor intensive than computer production. According to the Heckscher-Ohlin model, Hong
Kong will have a(n) ________ advantage in the production of __________ .
Answer absolute; shirts and computers
absolute; computers
comparative; shirts
comparative; computers

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Table: Capital Intensity Across Industries
U.S. Capital/Labor Ratios in Selected Industries
Industry K/L ($/worker)
Apparel and other textile products $8,274
Leather and leather products $12,466
Furniture $21,736
Lumber and wood products $39,134
Textile mill products $44,060
Electronic and electric equipment $54,582
Primary metal industries $123,594
Paper and allied products $171,730
Chemicals and allied products $192,593

Reference: Ref 4-2

(Table: Capital Intensity Across Industries) Which industry is the most labor intensive?
Answer apparel
lumber
primary metal industries
chemicals

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Table: Capital Intensity Across Industries

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U.S. Capital/Labor Ratios in Selected Industries

Industry K/L ($/worker)
Apparel and other textile products $8,274
Leather and leather products $12,466
Furniture $21,736
Lumber and wood products $39,134
Textile mill products $44,060
Electronic and electric equipment $54,582
Primary metal industries $123,594
Paper and allied products $171,730
Chemicals and allied products $192,593

Reference: Ref 4-2

(Table: Capital Intensity Across Industries) Suppose that the United States is labor abundant relative to Canada. Which
of the following products is the United States most likely to import from Canada?
Answer furniture
textile mill products
primary metal industries
paper and allied products

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If there are only two nations, one nation's exports are the other's imports; which of the following is identical for both
nations?
Answer equilibrium relative price
trade triangle
opportunity cost
equilibrium relative price, trade triangle, and opportunity cost

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Suppose that Home is a labor-abundant country. When trade occurs with Foreign, a capital-abundant country, the HO
model predicts that:
Answer the price of the labor-intensive good will rise in Home.
the price of the labor-intensive good will rise in Foreign.
the price of the capital-intensive good will fall in Foreign.
the price of the capital-intensive good will rise in Home.

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Figure: A Country's Before and After Trade Equilibria

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Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) At what point will the nation pictured be in a no-trade
equilibrium?
Answer A
B
C
D

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) What are the pretrade quantities of shoes and computers
produced by this nation?
Answer 300 shoes; 300 computers
225 shoes; 175 computers

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225 shoes; 200 computers

150 shoes; 300 computers

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) What is the equilibrium post-trade point of production?
Answer A
B
C
D

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Figure: A Country's Before and After Trade Equilibria

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Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) What are the post-trade quantities of shoes and computers
produced by this nation?
Answer 300 shoes; 300 computers
225 shoes; 175 computers
225 shoes; 200 computers
150 shoes; 300 computers

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) What happened to the relative price of shoes in this nation after
trade?
Answer Shoes became relatively more expensive in terms of computers.
Shoes became relatively cheaper in terms of computers.
Shoes were not as desirable after trade.
The price of shoes did not change—only the quantity.

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Figure: A Country's Before and After Trade Equilibria

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Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) The trade triangle shows the exports that were exchanged for
imports. What are the three points of the trade triangle?
Answer A, B, C
A, B, D
A, D, C
B, C, D

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) How many shoes will this nation export?
Answer 0
125
350

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500

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) How many shoes will this nation import?
Answer 0
125
350
500

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Figure: A Country's Before and After Trade Equilibria

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Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) How many computers will this nation export?
Answer 0
125
350
500

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) How many computers will this nation import?
Answer 0
125
350
500

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Figure: A Country's Before and After Trade Equilibria

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Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the
relative price of computers from the pretrade position, the price line will slide ______ on the diagram and show the new
production point in the domestic economy.
Answer up to the left
up to the right
down to the right
down to the left

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the
relative price of computers from the pretrade position, the price line will slide down to the right on the diagram and
show the new production point in the domestic economy. We will get the number of computers that producers will
produce at each price. If we subtract the number of computers purchased domestically at those same prices, we will

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get ____________ for computers.

Answer the import demand schedule
the export supply schedule
the production possibilities frontier
the indifference curve

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-3

(Figure: A Country's Before and After Trade Equilibria) If we change the price line in the diagram to increase the
relative price of computers from the pretrade position, the price line will slide down to the right on the diagram and
show the new production point in the domestic economy. We can compute how many shoes will be purchased as the
price of shoes decreases relative to computers. If we subtract domestic production at those prices, we will have
____________ for shoes.
Answer the import demand schedule
the export supply schedule
the production possibilities frontier
the indifference curve

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The assumptions that limit the HO model result in the Heckscher-Ohlin theorem, which states that:
Answer in the real world, with unlimited goods, nations will buy products that satisfy their demands and sell
products they have no use for.
if there are limited resources, such as capital and land, production varies directly with the amount of labor
used.
some factors of production are fixed and some are variable. We need only consider the variable factors
when we analyze international trade.
with two goods and two factors, each country will export the good that uses intensively the factor of
production it has in abundance and will import the other good.

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The conclusion that a labor-abundant country exports the good using labor intensively in production and a capital-
abundant country exports the good using capital intensively in production is known as:

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Answer factor-intensity reversal.

the Heckscher-Ohlin theorem.
Ricardian comparative advantage.
the Stolper-Samuelson theorem.

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Consider two products, automobiles and shoes. If shoes are labor intensive and automobiles are capital intensive,
what will happen under the HO model?
Answer The labor-abundant country will export automobiles.
The capital-abundant country will export shoes.
The labor-abundant country will import shoes.
The capital-abundant country will import shoes.

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Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000 workers and 700 units of
capital. Technology is identical in both countries. Assume that wine is the capital-intensive good and cloth is the labor-
intensive good. Which of the following statements is correct?
Answer Portugal will export wine and import cloth.
France will export wine and import cloth.
There is no basis for trade between France and Portugal.
Portugal will export cloth and import wine.

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Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000 workers and 700 units of
capital. Technology is identical in both countries. Assume that wine is the capital-intensive good and cloth is the labor-
intensive good. Which of the following statements is correct if the nations start trading with each other?
Answer Wages will increase in Portugal.
Rental rates in France will increase.
Wages in France will decrease.
Rental rates in Portugal will increase.

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Table: Data on Suburbia
Use this table, which represents autarkic and free-trade production and consumption and resource usage for Suburbia,
to answer the following question(s).
Autarky Free-Trade
Production of good X 1,000 units 2,000 units
Consumption of good X 1,000 units 1,000 units
Capital used to produce good X 1,000 units 2,000 units
Labor used to produce good X 1,000 days 1,250 days
Production of good Y 1,000 units 500 units
Consumption of good Y 1,000 units 2,000 units
Capital used to produce good Y 1,500 units 1,000 units
Labor used to produce good Y 500 days 250 days

Reference: Ref 4-4

(Table: Data on Suburbia) Which statement below is correct?

Answer Surburbia is a labor-intensive country.
Suburbia is a labor-abundant country.
Suburbia is a capital-intensive country.
Suburbia is a capital-abundant country.

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Table: Data on Suburbia
Use this table, which represents autarkic and free-trade production and consumption and resource usage for Suburbia,
to answer the following question(s).
Autarky Free-Trade
Production of good X 1,000 units 2,000 units
Consumption of good X 1,000 units 1,000 units
Capital used to produce good X 1,000 units 2,000 units
Labor used to produce good X 1,000 days 1,250 days
Production of good Y 1,000 units 500 units
Consumption of good Y 1,000 units 2,000 units
Capital used to produce good Y 1,500 units 1,000 units
Labor used to produce good Y 500 days 250 days

Reference: Ref 4-4

(Table: Data on Suburbia) What is the ratio of total capital to total labor in Suburbia?
Answer 1 unit/day
1.5 units/day
1.67 units/day
3 units/day

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Table: Data on Suburbia
Use this table, which represents autarkic and free-trade production and consumption and resource usage for Suburbia,
to answer the following question(s).
Autarky Free-Trade
Production of good X 1,000 units 2,000 units
Consumption of good X 1,000 units 1,000 units
Capital used to produce good X 1,000 units 2,000 units
Labor used to produce good X 1,000 days 1,250 days
Production of good Y 1,000 units 500 units
Consumption of good Y 1,000 units 2,000 units
Capital used to produce good Y 1,500 units 1,000 units
Labor used to produce good Y 500 days 250 days

Reference: Ref 4-4

(Table: Data on Suburbia) How many units of which product will Suburbia import?
Answer 2,000 units of X
1,000 units of X
2,000 units of Y
1,500 units of Y

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Table: Data on Suburbia
Use this table, which represents autarkic and free-trade production and consumption and resource usage for Suburbia,
to answer the following question(s).
Autarky Free-Trade
Production of good X 1,000 units 2,000 units
Consumption of good X 1,000 units 1,000 units
Capital used to produce good X 1,000 units 2,000 units
Labor used to produce good X 1,000 days 1,250 days

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Production of good Y 1,000 units 500 units

Consumption of good Y 1,000 units 2,000 units
Capital used to produce good Y 1,500 units 1,000 units
Labor used to produce good Y 500 days 250 days

Reference: Ref 4-4

(Table: Data on Suburbia) Did the capital-labor ratio used in the production of good X rise, fall, or remain unchanged as
Suburbia moved from autarky to free trade?
Answer rise
fall
remain unchanged
cannot determine from the information given in the table

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Table: Data on Suburbia
Use this table, which represents autarkic and free-trade production and consumption and resource usage for Suburbia,
to answer the following question(s).
Autarky Free-Trade
Production of good X 1,000 units 2,000 units
Consumption of good X 1,000 units 1,000 units
Capital used to produce good X 1,000 units 2,000 units
Labor used to produce good X 1,000 days 1,250 days
Production of good Y 1,000 units 500 units
Consumption of good Y 1,000 units 2,000 units
Capital used to produce good Y 1,500 units 1,000 units
Labor used to produce good Y 500 days 250 days

Reference: Ref 4-4

(Table: Data on Suburbia) Which statement is true concerning the change in the marginal product of labor as Suburbia
moved from autarky to a free-trade situation?
Answer The MPL in good X production rose.
The MPL in good Y production fell.
The MPL in good X and good Y production both rose
The MPL in good X and good Y production both fell.

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Leontief found that the HO model did not work for the United States because:
Answer the United States was importing labor-intensive commodities.
the U.S. capital/labor ratio for imported goods was larger than that for the exported goods.
the U.S. capital/labor ratio for imported goods was smaller than that for the exported goods.
there was a trade imbalance in the United States.

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Economist Wassily Leontief tested the Heckscher-Ohlin model to determine whether or not it correctly predicted the
capital and labor content of imports and exports of:
Answer Russia.
China.
the United States.
Belgium.

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Table: Factor Use in Trade
Exports Imports
Capital ($ million) $3.55 $5
Labor (person-years) 192 160
Capital/Labor ($/person)

Reference: Ref 4-5

(Table: Factor Use in Trade) In the hypothetical economy provided, what is the capital-to-labor ratio for exports?
Answer $1,849
$35,500
$18,490
$1,920

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Table: Factor Use in Trade
Exports Imports
Capital ($ million) $3.55 $5
Labor (person-years) 192 160
Capital/Labor ($/person)

Reference: Ref 4-5

(Table: Factor Use in Trade) In the hypothetical economy provided, what is the capital-to-labor ratio for imports?
Answer $31,250
$21,500
$1,600
$3,125

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The Leontief paradox found that:
Answer exports should always be capital intensive.
imports should always be labor intensive.
U.S. exports were labor intensive.
U.S. exports were capital intensive.

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Using 1947 data, Leontief discovered a “paradox” in his test. If the Heckscher-Ohlin model is correct, the United States
would have exported _____-intensive goods and imported _____- intensive goods; but his study indicated the reverse
was true.
Answer land; technology
labor; land
capital; labor
labor; capital

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Explanations of Leontief's paradox include all but the following:

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Answer Leontief ignored the fact that the United States imports a variety of products instead of just one.
He ignored the fact that U.S. labor is highly skilled.
He ignored the importance of land as a factor in many U.S. exports.
Trade patterns in 1947 might have been affected by the recent major war ended only 2 years earlier.

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Leontief found that:
Answer U.S. trade increased after World War II.
U.S. exports were capital intensive compared with its import-competing production.
U.S. exports were labor intensive compared with its import-competing production.
U.S. exports were neither capital nor labor intensive.

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The Leontief paradox questioned the validity of:
Answer the comparative advantage model.
the Heckscher-Ohlin model.
the Ricardian model.
the specific-factors model.

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Leontief's study of U.S. post-World War II trade concluded that the:
Answer United States did not gain from trade.
United States exported labor-intensive goods
HO model did not explain trade between Europe and the United States.
United States exported capital-intensive goods.

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What was “paradoxical” about Leontief's factor-proportions study of U.S. trade?
Answer Leontief concluded that U.S. imports were more labor intensive than U.S. exports.
Leontief concluded that U.S. imports were more capital intensive than U.S. exports.
Leontief concluded that U.S. imports were primarily agricultural products.
Leontief concluded that U.S. exports were not internationally competitive.

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Which of the following is a possible explanation for the Leontief paradox?
Answer Leontief's assumption that U.S. and foreign technologies are the same is not correct.
Leontief did not incorporate land and other resources.
Leontief did not distinguish between skilled and unskilled labor.
All of these answer choices are possible explanations for the Leontief paradox.

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Leontief suggested that his results were not a paradox once we account for:
Answer differences in resource endowments.
differences in capital stocks.
differences in labor forces.
differences in productivity of factors.

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Which of the following is not an explanation of Leontief's paradox?
Answer U.S. labor was more skilled than the foreign labor force.
U.S. exports were more skill intensive.
The data from 1947 might be unusual because the war had recently ended.
The United States always got preferential treatment from its trading partners.

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Which of the following countries has the most physical capital?
Answer the United States
China
Japan
India

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Which of the following countries has the most R&D scientists?
Answer the United States
China
Japan
India

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Which of the following countries has the most illiterate labor?
Answer the United States
China
Japan
India

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Compared with the rest of the world, the United States is most abundant in:
Answer capital.
skilled labor.
less-skilled labor.
arable land.

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Compared with the rest of the world, the United States is least abundant in:
Answer capital.
skilled labor.
unskilled labor.
illiterate labor.

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Question
A problem with measuring the factor shares to determine scarcity or abundance is that:
Answer it is very hard to count workers in some nations.
estimates are very unreliable.
the quantity of a factor may not be as important as its productivity.
scientists disagree over the method by which to compute “share.”

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Country X's effective factor endowment is defined as its:
Answer actual factor endowment times factor productivity.
actual factor endowment times GDP.
effective factor endowment times factor productivity.
actual factor endowment divided by its factor productivity.

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If we measure scarcity or abundance correctly, we should use the concept of “effective factor endowment.” This
means:
Answer the actual factor endowment multiplied by the average productivity of workers compared with its share of
world GDP.
trying to find out how much labor and capital are really involved in producing goods competing with imports
and exports.
measuring more effectively a nation's actual factor endowment.
the actual factor endowment of labor multiplied by the productivity of capital, because, effectively, the
productivity of one depends on the quantity of the other.

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Compared with other countries, the United States' effective factor endowment is greatest for:
Answer capital.
R&D scientists.
arable land.
unskilled labor.

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A retest of the HO prediction and the Leontief paradox for the United States reveals that:
Answer taking into account the differing labor productivities brings more consistent results.
new procedures to measure the effective factor content of imports and exports confirm the HO hypothesis.
Leontief's paradox is solved once we adjust the U.S. labor force in 1947 for its higher productivity.
All of the answer choices are correct.

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The paradox of India's importation of cotton textiles in the early twentieth century may also be explained by:
Answer more accurate measurements of its imports and exports.
accounting for wide differences in labor productivity using effective factor endowments.
exploring ways to adjust for differences in national income and custom—Indian consumers purchased
more textiles per capita than in higher-income nations.
the fact that textiles in India were capital intensive.

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Question
After accounting for differing _________ as well as _________, evidence is broadly consistent with the
Heckscher-Ohlin model.
Answer productivities; endowments
preferences; productivities
preferences; endowments
endowments; generalities

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Assume that Home is relatively abundant in labor and relatively scarce in land. The Heckscher-Ohlin model predicts
that trade with other countries will cause increased returns to:
Answer Home's labor.
Home's land.
both Home's labor and land.
neither Home's labor nor land.

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If Japanese workers receive lower wages in the production of autos compared with American workers, then:
Answer Japan must have a comparative advantage in the production of autos.
Japan must have an absolute advantage in the production of autos.
auto production costs must be lower in Japan than in the United States.
auto production costs could be lower in the United States if U.S. labor productivity is higher than Japanese
labor productivity.

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In a capital-abundant country, free trade will cause a(n) __________ in the rental of capital and a(n) ____________ in
the marginal product of capital.
Answer increase; increase
increase; decrease
decrease; decrease
decrease; increase

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In a labor-abundant country, free trade will cause a(n) __________ in the rental of capital and a(n) _________ in the
marginal product of capital.
Answer increase; increase
increase; decrease
decrease; decrease
decrease; increase

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The wage paid to labor should increase when:
Answer the capital/labor ratio increases.
the capital/labor ratio decreases.
a country's labor force increases.
a country's capital stock decreases.

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Question
With the “opening” of trade, the item exported experiences a ________ in demand and therefore a ________ in its
relative (domestic) price, whereas the item imported experiences a(n) ________ in demand and therefore a(n)
________ in its relative (domestic) price.
Answer rise, rise; decrease, decrease
rise, fall; increase, decrease
fall, fall; increase, increase
fall, rise; decrease, increase

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The HO model predicts that firms will increase production of the item exported and hire more resources. Therefore the
factor of production used more intensely in the production of exports will experience:
Answer a decline in demand and a decline in the relative wage (rental price).
a decline in demand and an increase in the relative wage (rental price).
an increase in demand and an increase in the relative wage (rental price).
no change in demand because the factors of production are fixed in the short run.

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The HO model predicts that firms will increase production of the item exported and hire more resources. A resulting
prediction is that the resources used in the item imported will experience:
Answer a decline in demand and a decline in the relative wage (rental price).
a decline in demand and an increase in the relative wage (rental price).
an increase in demand and an increase in the relative wage (rental price).
no change in demand because the factors of production are fixed in the short run.

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As trade takes place, imports will force firms to decrease price and production and lay off resources, which will be
absorbed by the other industry at a lower wage (rental price). The result is that:
Answer unfortunately, neither industry can afford to hire laid-off resources.
the lower wage makes it possible for both industries to hire more of the resource, and therefore the ratio
of that resource to the other rises in both industries.
the government usually provides assistance to workers laid off due to trade.
the lower wage (rental price) means that consumers will not be able to purchase all the production and
there will be a recession.

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SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is
relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in
capital, and Italy is relatively abundant in labor.

Reference: Ref 4-6

(Scenario: France and Italy) Which statement below is correct?

Answer Italy has a larger labor force than France.
France has a larger labor force than Italy.
The ratio of Italy's total capital stock to its labor force is smaller than the same ratio for France.
The ratio of Italy's total capital stock to its labor force is larger than the same ratio for France.

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SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is

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relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in
capital, and Italy is relatively abundant in labor.

Reference: Ref 4-6

(Scenario: France and Italy) According to the HO model, what product will Italy export?
Answer bread
wine
both bread and wine
neither bread nor wine

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SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is
relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in
capital, and Italy is relatively abundant in labor.

Reference: Ref 4-6

(Scenario: France and Italy) According to the HO model, free trade between Italy and France should cause:
Answer a decrease in the French price of wine and a decrease in the Italian price of wine.
increases in the price of wine in Italy and in France.
an increase in the French price of wine and an increase in the Italian price of bread.
a decrease in the Italian price of bread and a decrease in the French price of wine.

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SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each produces wine and bread. (3) The production of bread is
relatively capital intensive, and the production of wine is relatively labor intensive. (4) France is relatively abundant in
capital, and Italy is relatively abundant in labor.

Reference: Ref 4-6

(Scenario: France and Italy) According to the HO model, free trade between France and Italy should result in:
Answer increased wages in both countries.
decreased wages in both countries.
increased wages in France and increased returns to capital in Italy.
increased returns to capital in France and increased wages in Italy.

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According to the Heckscher-Ohlin model, international trade for a nation with a relative abundance of skilled labor and
a relative scarcity of unskilled labor will tend to:
Answer widen or aggravate the income disparity between skilled and unskilled workers.
reduce the income disparity between skilled and unskilled workers.
lower the wages of both groups of workers.
raise the wages of both groups of workers.

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SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and chemicals using labor and capital as the only inputs in
production. The United States is capital abundant, and Canada is labor abundant. Computer production is more labor
intensive than chemical production in both countries.

Reference: Ref 4-7

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(Scenario: Canada and the United States) What does the Heckscher-Ohlin model predict will happen to wages and
returns to capital after trade takes place between Canada and the United States?
Answer Wages of Canadian workers should rise.
Returns to capital in Canada should rise.
Wages of U.S. workers should rise.
Returns to capital in the United States should fall.

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SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and chemicals using labor and capital as the only inputs in
production. The United States is capital abundant, and Canada is labor abundant. Computer production is more labor
intensive than chemical production in both countries.

Reference: Ref 4-7

(Scenario: Canada and the United States) What does the Heckscher-Ohlin model predict will happen to prices of
computers or chemicals in the two countries?
Answer The price of chemicals should rise in the United States.
The price of chemicals should fall in the United States.
The price of computers should fall in Canada.
The price of chemicals should rise in Canada.

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SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital
abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

Reference: Ref 4-8

(Scenario: Chile and the United States) Which statement below is correct?
Answer The United States has more capital than Chile.
The United States has less labor than Chile.
The ratio of the United States total capital stock to its labor force is higher than the same ratio for Chile.
The ratio of Chile's total capital stock to its labor force is higher than the same ratio for the United
States.

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SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital
abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

Reference: Ref 4-8

(Scenario: Chile and the United States) Which statement below is correct?
Answer More capital is used in the production of automobiles than wheat.
Less labor is used in the production of automobiles than wheat.
The capital/labor ratio used in the production of automobiles is higher than the capital/labor ratio used in
the production of wheat.
The capital/labor ratio used in the production of wheat is higher than the capital/labor ratio used in the
production of automobiles.

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SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital

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abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

Reference: Ref 4-8

(Scenario: Chile and the United States) According to the Heckscher-Ohlin model:
Answer Chilean workers should support U.S.-Chile free trade.
Chilean owners of capital should support U.S.-Chile free trade.
U.S. owners of capital should oppose U.S.-Chile free trade.
Both U.S. and Chilean owners of capital should oppose U.S.-Chile free trade.

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SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital
abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

Reference: Ref 4-8

(Scenario: Chile and the United States) According to the Heckscher-Ohlin model:
Answer The United States should export automobiles to Chile.
The United States should export wheat to Chile.
Chile should export automobiles to the United States.
Chile should import wheat from the United States.

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SCENARIO: CHILE AND THE UNITED STATES
Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital
abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

Reference: Ref 4-8

(Scenario: Chile and the United States) What is the most important reason why U.S. workers might oppose U.S.-Chile
free trade?
Answer Returns to capital in the United States are expected to rise as a result of U.S.-Chile free trade.
Wages in the United States are expected to rise as a result of U.S.-Chile free trade.
Returns to capital in Chile are expected to rise as a result of U.S.-Chile free trade.
Wages in the United States are expected to fall as a result of U.S.-Chile free trade.

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Based on the HO model, what is the result on the real returns to factors of production?
Answer Labor and capital must be used together in production, and there is no room for competition for
remuneration.
Capital owners always get the “gains from trade.”
Resources used intensively in export industries (such as labor in China and capital in the United States)
will see an increase in their returns, whereas the resources used intensively in import-competing industries
will see a decline in their return.
Poor nations will always get the least returns to their factors of production.

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If Home is capital abundant, then when it begins to freely trade with the rest of the world, the return to capital in Home
should _________ and the real wage in Home should _______.
Answer fall, rise
fall, fall
rise, rise
rise, fall

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In the long run, when factors are mobile, an increase in the relative price of a good will increase the real earnings of the
factor used intensively in the production of that good. This is known as:
Answer the Heckscher-Ohlin theorem.
the Stolper-Samuelson theorem.
the Ricardian model.
the specific-factor theorem.

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The conclusion that international trade will lead to an increase in real earnings of a country's abundant resource is
known as:
Answer factor-intensity reversal.
the Heckscher-Ohlin theorem.
Ricardian comparative advantage.
the Stolper-Samuelson theorem.

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The Stolper-Samuelson theorem suggests that, over time, free international trade should lead to:
Answer equalization of real wages across the world.
greater divergences in real wages across the world.
equalization of prices across the world.
greater divergences in prices across the world.

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If a country is exporting computers, which are capital intensive, what will happen to the rental rate on capital?
Answer It will decrease.
It will stay the same.
It will increase.
Not enough information is given.

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Suppose that the price of shoes (which are labor intensive) has risen by 10%. Then which of the following can you say
for sure about Home?
Answer Home wages will rise by more than 10%.
Home rental rates will rise by more than 10%.
Home wages will rise by no more than 10%.
Home rental rates will fall by at least 10%.

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Question
Suppose that the price of shoes (which are labor intensive) has risen by 5%. Then which of the following can you say
for sure about home?
Answer Home wages will rise by more than 5%.
Home rental rates will rise by more than 5%.
Home wages will rise by no more than 5%.
Home rental rates will fall by no more than 5%.

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Question
Feenstra and Taylor describe the “magnification effect” of trade. This effect describes how:
Answer Workers tend to complain more about trade than is justified.
Owners of capital can “magnify” their earnings if they are able to trade.
Small changes in relative prices as a result of trade lead to larger long-run changes in the real wage or
rental of factors.
Unemployment is a big problem among workers but not capital because workers have to move when they
are laid off.

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Suppose that all countries eliminate their barriers to trade. The Heckscher-Ohlin model predicts that:
Answer wages should become more equal throughout the world.
wages should become more unequal throughout the world.
the volume of international trade should fall.
there should be increased migration of labor among countries.

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Surveys have found that _____________ are the strongest proponents of placing limits on imports.
Answer unskilled workers
farmers
skilled workers
college professors

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Which of the following groups is least likely to favor free trade?
Answer farmers
unskilled workers
economists
more educated workers

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Which of the following groups will NOT gain if China and the United States engage in completely free trade?
Answer U.S. unskilled labor
U.S. consumers of Chinese made products
U.S. skilled labor
U.S. owners of capital

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Measuring the “factor content” of exports and imports helps determine:
Answer the shares of factors of production used to produce exports and implicitly imports.
a nation's competitiveness.
changes in the wage rate.
changes in the unemployment rate.

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Question
Table: Factor Use in Latvian Trade
Factor Contents of Latvia's Trade
Import Substitutes Exports
Dollars of capital per million dollars of: $4,000 $3,000
Years of labor per million dollars of: 2,000 3,000

Reference: Ref 4-9

(Table: Factor Use in Latvian Trade) Does Latvia import capital- or labor-intensive products?
Answer capital intensive
labor intensive
neither capital nor labor intensive
both capital and labor intensive

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Table: Factor Use in Latvian Trade
Factor Contents of Latvia's Trade
Import Substitutes Exports
Dollars of capital per million dollars of: $4,000 $3,000
Years of labor per million dollars of: 2,000 3,000

Reference: Ref 4-9

(Table: Factor Use in Latvian Trade) According to the Heckscher-Ohlin model, Latvia's capital/labor ratios are
consistent with:
Answer Latvia being a capital-abundant country.
Latvia being a labor-abundant country.
Latvia being neither a capital- nor labor-abundant country.
Latvia being both a labor- and capital-abundant country.

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To determine whether a nation has an “abundance” of a resource, economists:
Answer look at the exports of the nation.
look at the imports of the nation.
look at the total quantity of that resource compared with the total quantity of the other resource.
look at a nation's share of the factor compared with its share of world GDP.

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If a nation has a higher share of the factor than its share of world GDP, we say that the factor is:
Answer scarce.
plentiful but limited.
abundant.
constrained.

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Question
Suppose that Home has 20% of the world's capital, 10% of the world's skilled labor, and 30% of the world's unskilled
labor and produces 20% of the world's GDP. This information suggests that Home is:
Answer capital abundant.
skilled-labor abundant.

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less-skilled-labor abundant.
not abundant in capital, skilled labor, or unskilled labor.

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Table: Employee Compensation Across Industries
Apparel and clothing $25,290
Chemical products $70,242
Industrial machinery and equipment $53,452
Instruments and related products $59,268
Leather and leather products $30,528
Textiles and textile products $31,897

Reference: Ref 4-10

(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual
employee compensation (including fringe benefits) for 1990 in several U.S. industries. China and India are labor
abundant relative to the United States. According to the HO model, which U.S. industries were most likely to face the
strongest competition from Chinese and Indian imports in 1990?
Answer apparel and clothing, chemical products, industrial machinery and equipment
apparel and clothing, leather and leather products, textiles and textile products
chemical products, industrial machinery and equipment, instruments and related products
industrial machinery and equipment and instruments and related products

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Table: Employee Compensation Across Industries
Apparel and clothing $25,290
Chemical products $70,242
Industrial machinery and equipment $53,452
Instruments and related products $59,268
Leather and leather products $30,528
Textiles and textile products $31,897

Reference: Ref 4-10

(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual
employee compensation (including fringe benefits) for 1990 in several U.S. industries. China and India are labor
abundant relative to the United States. According to the HO model, we assume U.S. apparel and clothing, leather and
leather products, and textiles and textile products industries were most likely to face the strongest competition from
Chinese and Indian imports in 1990. Why do we reach this conclusion?
Answer Apparel and clothing, chemical products, and industrial machinery and equipment all use capital-
intensive production techniques.
Apparel and clothing, leather and leather products, and textiles and textile products all use capital-
intensive production techniques.
Apparel and clothing, leather and leather products, and textiles and textile products all use labor-
intensive production techniques.
Chemical products, industrial machinery and equipment, and instruments and related products all use
labor-intensive production techniques.

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Table: Employee Compensation Across Industries
Apparel and clothing $25,290
Chemical products $70,242
Industrial machinery and equipment $53,452
Instruments and related products $59,268

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Leather and leather products $30,528

Textiles and textile products $31,897

Reference: Ref 4-10

(Table: Employee Compensation Across Industries) The table Employee Compensation Across Industries gives annual
employee compensation (including fringe benefits) for 1990 in several U.S. industries. The U.S. aggregate (total)
capital/labor ratio was $34,705 worker in 1990. The aggregate (total) capital/labor ratios in Finland, Germany, and
Norway ranged between $45,000 and $50,000 per worker in 1990. According to the factor proportions theory, which
U.S. industries were most likely to face strong competition from Finland, Germany, and Norway during the 1990s?
Answer apparel and clothing, chemical products, industrial machinery and equipment
apparel and clothing, leather and leather products, textiles and textile products
chemical products, industrial machinery and equipment, instruments and related products
chemical products, leather and leather products, textiles and textile products

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Using a new procedure, economists can test the HO hypothesis and determine whether or not a nation's exports reflect
its abundant factor. This is:
Answer the signal experiment, which involves calculating the factor content of each shipment.
the sign test—taking the difference of the effective factor share and the share of world GDP to determine
whether it is positive or negative compared with the sign of its factor content of net exports.
comparing the factor content of exports with the factor content of goods produced in import sectors of the
economy.
the signal experiment, which involves calculating the factor content of net exports.

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The Heckscher-Ohlin model offers an explanation of the:
Answer gains from international trade.
pattern of international trade.
effects of international trade on returns to mobile resources.
gains from international trade, the pattern of international trade, and the effects of international trade on
returns to mobile resources.

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The sign test states that an abundant factor used in a country's exports should:
Answer have a negative sign.
have a positive sign.
be cheaper than the imports.
be more expensive than the imports.

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The sign test compares a country's:
Answer effective factor endowment with its share of world GDP.
effective factor endowment with its share of world trade.
share of world GDP with its share of world trade.
share of the world effective factor endowment with its share of world trade.

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Tests of the extended Heckscher-Ohlin model:

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Answer conclusively support the model.

conclusively reject the model.
find mixed evidence depending on the years and methods used.
have yet to be carried out.

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The Heckscher-Ohlin model is a long-run model in which labor, capital, and other resources can move freely between
industries and across countries.
Answer True
False

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In the Heckscher-Ohlin model labor cannot move across countries, but capital is mobile internationally.
Answer True
False

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In the Heckscher-Ohlin model, countries trade because the available resources (labor, capital, and land) differ across
countries.
Answer True
False

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According to the Heckscher-Ohlin model, differences in technology across countries are a major cause of international
trade.
Answer True
False

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According to the HO theorem, a country will export only those commodities that use its scarce factors.
Answer True
False

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With two goods, two factors, and two countries, the Heckscher-Ohlin model predicts that a country will export the good
that uses its abundant factor intensively and import the other good.
Answer True
False

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Question
With two goods, two factors, and two countries, the Heckscher-Ohlin model predicts that a country will export the good
that uses its intensive factor abundantly and import the other good.
Answer True
False

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Using U.S. data for 1947, Leontief found that U.S. exports were more capital intensive and less labor intensive than
U.S. imports. This was a paradoxical finding because the United States was abundant in capital.
Answer True
False

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Table: Factor Use in Trade
Exports Imports
Capital ($ million) $3.55 $5
Labor (person-years) 192 160
Capital/Labor ($/person)

Reference: Ref 4-11

(Table: Factor Use in Trade) The information given in the table was for a country with abundant labor, hence it violates
the HO model.
Answer True
False

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The increased R&D spending in China should lower their effective R&D scientist abundance.
Answer True
False

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One commonly accepted explanation of the Leontief paradox is that the United States is abundant in skilled labor.
Answer True
False

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The Stolper-Samuelson theorem indicates that an increase in the relative price of a good will cause the real earnings of
labor and capital to move in opposite directions.
Answer True
False

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The Stolper-Samuelson theorem states that with trade, the abundant factor benefits and the scarce factor loses.
Answer True
False

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Taking part in free trade benefits everybody.

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Answer True
False

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The Heckscher-Ohlin theory and the Stolper-Samuelson theorem together lead to the conclusion that that a country's
abundant factor gains and its scarce factor loses from international trade.
Answer True
False

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During the 1990s, U.S. agricultural net exports were approximately zero.
Answer True
False

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The Heckscher-Ohlin model cannot explain trade patterns among countries with similar labor productivities and similar
wages such as the United States and Switzerland.
Answer True
False

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After controlling for productivity differences, the sign test confirms the findings of the Heckscher-Ohlin model.
Answer True
False

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The table below represents autarkic and free-trade production and consumption and resource usage for Suburbia.
Autarky Free-Trade
Production of good X 100 units 200 units
Consumption of good X 100 units 100 units
Capital used to produce good X 100 units 200 units
Labor used to produce good X 100 days 125 days
Production of good Y 100 units 50 units
Consumption of good Y 100 units 200 units
Capital used to produce good Y 150 units 100 units
Labor used to produce good Y 50 days 25 days

A) Is Surburbia a labor- or a capital-abundant country? Explain your answer.

B) What is the price of good X in autarky? With free trade?
C) How many units of what product are exported? How many units of what product are imported?
D) Has the marginal product of labor in good X production increased or decreased? Explain your answer.
E) Has the marginal product of capital in good Y production increased or decreased? Explain your answer.

Answer A) Surburbia is a labor-abundant country since its export product (X) is labor intensive.
B) The price of good X is 1Y = 1X since it produces and consumes 100X and 100Y in autarky.
C) 100 units of good X are exported since 200 units are produced and 100 are consumed; 150 units of
good Y are imported since 50 are produced and 200 are consumed.
D) The MPL in good X has increased since the capital-labor ratio in X production has risen from 1 unit/day
to 200 units/125 day. Note the same is true in good Y production since its capital-labor ratio also rose
from 150 units/50 days to 100 units/25 days.

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E) The MPK decreased in good Y production since 1 unit of capital now has fewer units of labor with which
to work (compare 3:1 with autarky to 4:1 with free trade).

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Figure: A Country's Before and After Trade Equilibria

Reference: Ref 4-12

(Figure: A Country's Before and After Trade Equilibria) According to the figure provided, how can you decide whether
or not the nation has “gained” from trade and has a higher standard of living?
Answer Using all its resources to produce both computers and shoes allows this nation to get on indifference curve U .
1
After trade, by exporting computers and importing shoes, this nation is able to increase its standard of living
and move higher to indifference curve U .
2

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According to the Stolper-Samuelson theorem, would you expect U.S. skilled workers to benefit from free trade
worldwide?
Answer Yes, since the U.S. appears to be skilled labor abundant and trade causes returns to a country's abundant
factor to increase (according to the Stolper-Samuelson theorem). Freer trade should benefit U.S. skilled
workers and harm U.S. unskilled workers.
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According to the Stolper-Samuelson theorem, would you expect all workers across the globe to favor limiting trade?
Why or why not?
Answer No. The Stolper-Samuelson theorem indicates that wages will fall in the labor-abundant country but rise in the
capital-abundant country when trade is limited. Thus, one would not expect worldwide support for limiting
trade.
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If China has a comparative advantage in producing low-skilled, labor-intensive goods, what should happen to Chinese
low-skilled workers' wages as trade barriers against Chinese imports fall across the world? What should happen to
returns to capital in China?

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Answer Wages of Chinese low-skilled workers should rise relative to wages of similar workers in their trading partners.
Returns to capital should fall relative to returns to capital in their trading partners. Note: Widely publicized
reports of wage increases in many Chinese firms during the summer of 2010 corroborate this expectation.
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In a labor-abundant nation, would workers be more or less favorable to international trade? What about a capital-
abundant nation? Why?
Answer Workers would be more favorable to trade in the labor-abundant nation because trade increases their real
wage and standard of living. In the capital-abundant nation, workers would see a decline in their real wage
and a decrease in their purchasing power as a result of lower wages and higher prices—they would oppose
trade.
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Who is (are) likely to lose if the United States imposed restrictions on its imports from China?
Answer Losers include: consumers of Chinese-made goods; workers and firms directly engaged in the production of
exports to China; and workers and firms supplying material inputs used in the production of exports to China.
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