978-0132146654 Chapter 5 Solution Manual

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nAnswers to Textbook Problems

1. a. The first step is to compute the opportunity cost of both cloth and food. We are given the

following resource constraints:

Solve these two constraints for the quantity of food produced:

This gives us two budget constraints for food production that must both be met. The production

possibilities frontier traces out these budget constraints for food and cloth production.

Looking at the diagram, we see that production of both food and cloth will take place when the

relative price of cloth is between the two opportunity costs of cloth. The opportunity cost of cloth

is given by the slopes of the two components of the production possibilities frontier above, 2/3

and 2. When cloth production is low, the economy will be using relatively more labor to produce

cloth and the opportunity cost of cloth is 2/3 a unit of food. However, as cloth production rises,

the economy runs scarce on labor and must take capital away from food production, raising the

opportunity cost of cloth to 2 units of food.

b. Note the input requirements for each good. One unit of cloth can be produced using 2 units of

capital and 2 units of labor. One unit of food is produced using 3 units of capital and 1 unit of

labor. In a competitive market, the unit cost of each good must be equal to the output price.

c. Looking at the two expressions above, we see that an increase in the price of cloth will cause the

d. The capital stock increases to 4,000. The labor constraint will remain unchanged, keeping the

maximum price of cloth at 2 units of food. The new capital constraint is given by:

Chapter 5 Resources and Trade: The Heckscher-Ohlin Model 19

e. The actual production point for cloth and food will depend on the relative prices of cloth and food.

If we assume that the economy is producing at a point such that all resources are being utilized

(point 3 in Figure 5-1), then we can compute the quantities of cloth and food by setting the resource

constraints equal to one another:

f. Prior to the expansion of the capital stock, the economy was producing 750 units of cloth and

2. The definition of cattle growing as land intensive depends on the ratio of land to labor used in

production, not on the ratio of land or labor to output. The ratio of land to labor in cattle exceeds the

3. This question is similar to an issue discussed in Chapter 4. What matters is not the absolute abundance

of factors, but their relative abundance. Poor countries have an abundance of labor relative to capital

when compared to more developed countries. For example, consider a large, rich country like the

4. In the Ricardian model, labor gains from trade through an increase in its purchasing power. This

result does not support labor union demands for limits on imports from less affluent countries. The

Heckscher-Ohlin model directly addresses distribution by considering the effects of trade on the owners

Chapter 5 Resources and Trade: The Heckscher-Ohlin Model 20

5. Specific programmers may face wage cuts due to the competition from India, but this is not inconsistent

with skilled labor wages rising. By making programming more efficient in general, this development

may have increased wages for others in the software industry or lowered the prices of the goods overall.

In the short run, though, it has clearly hurt those with sector-specific skills who will face transition costs.

6. The factor proportions theory states that countries export those goods whose production is intensive

in factors with which they are abundantly endowed. One would expect the United States, which

that countries’ exports and imports reflect the relative endowments of factors. 7. If the efficiency

of the factors of production differs internationally, the lessons of the Heckscher-Ohlin theory would

be applied to “effective factors,” which adjust for the differences in technology

or worker skills or land quality (for example). The adjusted model has been found to be more