Suggested answer to case study discussion question
The Leontief Paradox: Leontief’s results appeared to directly contradict
the Heckscher–Ohlin theory. The United States, a relatively physical
capital-abundant country and a relatively labor-scarce country, exported
relatively labor-intensive products and imported relatively capital-intensive
products. There are several di”erent scienti#c responses to such an empirical
result. First, economists could abandon the Heckscher–Ohlin theory. However,
to abandon the theory, economists would need some other theory to replace
it. Two contenders existed. A theory based on demand-side di”erences
seemed even less plausible. Theories based on technology and labor
productivity di”erences (like the Ricardian theory) also seemed too limited.
Second, economists could question the quality of the data on which the tests
were based. Leontief was a careful researcher, and his handling of the data
seemed to be reasonable. Third, economists could question the way in which
the test was designed and executed. Instead of abandoning the
Heckscher–Ohlin theory, economists took this route. The H-O theory is based
on factor endowments and factor intensities, but the theory does not name
the factors, and it certainly does not say that the only factors are physical
capital and labor. It turned out to be useful to consider additional factors
(e.g., types of land) and re#nement of broad factors (e.g., less-skilled and
more-skilled labor).
Suggested answers to end of chapter questions and problems
1. Mexico is abundant in unskilled labor and scarce in skilled labor
relative to the United States or Canada. With freer trade Mexico
2. Not correct. First, it is not clear what this statement means. The real wage is measured per
unit of labor and the real rental rate is measured per unit of land. Because the units of
31
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
3. Disagree. Opening up free trade does hurt people in import-competing
industries in the short run—essentially due to the loss of producer
surplus. The long-run e”ects are di”erent because people and
4. First, you might point out that stopping trading would also eliminate exports, so that
many jobs would be lost in exporting industries. It is not clear that there would be a net
gain in jobs, and any net gain would likely be small. In addition, total employment in the
5. Leontief conducted his research shortly after World War II, when it seemed clear that the
United States was abundant in capital and scarce in labor, relative to the rest of the world.
6. A decrease in the relative price of wheat leads to a decrease in domestic production of
wheat. This is also an increase in the relative price of cloth, so there is an increase in the
production of cloth. In the short run factors are mainly tied to their initial industries,
32
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
7. Yes. The Heckscher–Ohlin theory states that a country will export products that require
(in their production) relatively large amounts of the country’s relatively abundant factor
inputs. First, consider the relatively abundant factor inputs in China and South Korea. As
8. International factor price equalization is the theory to help us understand the change. This
is an example of how increases in international trade (in this case, trade in software
9. a. With prices of 100, the two equations are
100 = 60w+ 40r
b. With the new price of cloth, the two equations are
100 = 60w+ 40r
c. The real wage with respect to wheat increases from 0.01 (or 1/100) to about 0.0153 (or
1.53/100). The real wage with respect to cloth increases from 0.01 (or 1/100) to about
33
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
d. These results are an example of the Stolper–Samuelson theorem. Wheat is relatively
intensive in land, and cloth is relatively intensive in labor. The increase in the price of
10. a. If all factors are immobile, the increase in the relative price of corn and the effort to
expand corn production tends to benefit the earnings of all factors initially employed in
b. If all factors are freely mobile between the corn and vehicle industries, the winners and
losers depend on the increased demand for each factor as corn production expands,
relative to the release of each factor as vehicle production decreases. The labor-intensity
11. The total input share of labor in each dollar of cloth output is the sum of the direct use of
labor plus the labor that is used to produce the material inputs into cloth production:
0.5 + 0.1 0.3 + 0.2 0.6 = 0.65
12. According to Figure 5.3, Japan is relatively abundant in physical capital, highly-skilled
labor, and medium-skilled labor. Japan is relatively scarce in unskilled labor, crop land,
34
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
35
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Sample assignment
NEW YORKUNIVERSITY
SternSchool of Business
Economics of Global Business
Country Assignment #1
The text of your group‘s answers to the assignment should be typed single-spaced, with an extra
space between each paragraph. The text must be limited to a maximum of four pages. You may also
attach additional tables and charts to this four pages of text, if these tables and charts are of direct
importance to your answers.
The group members are not to discuss this assignment with anyone else who is not in the group
(except for consulting reference librarians in order to locate materials). The group may utilize any
published materials—you are not limited to the sources noted in the assignment description below.
Each group must choose one country that will be used for both this assignment and the second
country assignment. For several different reasons, the country chosen cannot be any of the
following: the United States, Germany, France, Italy, Austria, Belgium, Finland, Greece, Ireland,
Luxembourg, Netherlands, Portugal, Spain, Slovenia, Malta, Cyprus, Slovakia, Estonia, Latvia,
Lithuania, Japan, Canada, China, Hong Kong, Macau, Singapore. Also, the country chosen cannot
be a country which is the country of citizenship of any group member or a country in which any
group member has lived for a period of one year or more.
Before your group commits to a choice of country, you might want to check to make sure that data
are available for that country. Most importantly, you might want to check to make sure that the
country chosen has useful data not only in the sources shown in the assignment below, but also in a
publication of the International Monetary Fund—International Financial Statistics—that may be a
major source for the second country assignment. Some countries are not shown in the UN and IMF
sources—for these countries, one must use other data sources (e.g., national reports), and this may
be challenging. One final note on selecting a country—for the second country assignment, analysis
of a country that has experienced very high inflation rates for part or all of the time since 1990 will
be very interesting, but gathering and interpreting the data may be challenging.
The Assignment
1. For the most recent year for which data are available in the UN database noted below (or in
a comparable data source), present a full set of data (in easily readable form) on the
country’s exports and imports, at the two-digit SITC level. (The SITC is the Standard
International Trade Classification.) Which products are the country’s major export products?
Which products are the country’s major import products? (The text discussion for this part of
36
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
the assignment should be brief and descriptive. It serves as an introduction to the rest of the
report.)
Most likely data source: United Nations, Commodity Trade Statistic Database
(comtrade.un.org/db). Here are a few tips on using this database. For Data Query, use Basic
Selection. Use SITC Rev. 3, if possible. For Commodities Search, Use Special Items, 2 digit
codes. After you submit your query, note that you are able to download the data.
2. To what extent do various theories of trade appear to explain the country’s commodity
(product) pattern of trade (or to explain various aspects of this pattern)? In your answer here,
you might examine the commodity pattern of exports, the commodity pattern of imports, the
commodity pattern of net exports (exports minus imports) in absolute (money) amounts,
and/or the commodity pattern of net exports of each product as a percentage of total trade
(exports plus imports) of this product by the country. In addition, the extent of intraindustry
trade in the various products should also be documented and examined with reference to
theory.
3. For the most recent year for which data are available, document the five countries that are
the largest buyers of your country’s exports. For the most recent year for which data are
available, document the five countries that are the largest sources of your country’s imports.
Discuss briefly the probable reasons for this pattern of major trading-partner countries.
(Your discussion may need to incorporate reasons that go beyond what we have discussed in
class.)
Most likely data source: International Monetary Fund, Direction of Trade Statistics.
37
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.