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APPLICATION
Opinions Toward Free Trade
Workers’ attitudes toward limitations on free trade depend on whether we are in the short
run or long run. More specifically, assuming that workers earn a portion of the rental on
the specific factor in their industry, the short-run specific-factor model predicts that
workers in export industries will be against placing limits on free trade because the
specific factor in their industry gains, whereas workers in import industries will favor
limits on free trade because the specific factor in that industry loses. Therefore, in the
toward free trade. Instead, workers’ skill level, measured by their wages or years of
education, was more important. In other words, as predicted by the Heckscher–Ohlin
model, skilled workers favor free trade and workers with lower wages or fewer years of
education tend to support import restrictions.
In addition to skill level, the survey also shows that home ownership plays a role in
workers’ attitudes toward limits on free trade. In particular, home-owning workers in
4 Conclusion
By focusing on the relative amount of labor and capital used in production, the
Heckscher–Ohlin model predicts the gainers and losers in each country when it engages
in international trade. More specifically, the model suggests that the factor used
TEACHING TIPS
Tip 1: Heckscher–Ohlin Game
This is most likely the first time students will be exposed to an international trade model
such as the Heckscher–Ohlin model. To get students comfortable with the concept of
Tip 2: Discussion of Factor Intensity Reversal
One key assumption in the H–O model is the absence of factor intensity reversal, such as
Tip 3: Testing H–O with World Bank Data
In this chapter, we attempted to test the predictions of the H-O model by comparing
countries’ share of world GDP with their factor endowment to predict trade flows. Ask
students to collect data similar to that shown in Figure 4-6, which is available through the
Tip 4: What Do Economists Think About Free Trade?
The IGM Forum, supported by the Chicago Booth School of Business, polls prominent
economists on their opinions about various subjects, including who wins and who loses
IN-CLASS PROBLEMS
1. What is paradoxical about the results of Leontief ’s test of the Heckscher–Ohlin
model?
Answer: According to the Heckscher–Ohlin model, the United States, a capital-
2. Suppose Indonesia and Canada trade in sarongs and beer. Use the following data for
Canada to answer the questions:
Sarongs: Sales revenue = PS • QS = $80
Payments to labor = W • LS = $80
a. Which industry is labor-intensive?
b. Give the percentage change in the rental on capital.
Answer:
Equating the sarong equation with the beer equation:
c. Compare the magnitude of the percentage in the rental on capital in part (b) with
that of labor.
Answer: The percentage change in the rental of capital is lower than the
d. Identify the factor that benefits from trade in real terms. Which factor loses?
Answer: Labor gains in real terms because the percentage increase in wage is
3. Consider two countries, Spain and Italy, where the only two factors of production are
capital and labor. Spain has 100 units of capital and 400 units of labor and Italy has
200 units of capital and 100 units of labor. Both countries produce two goods, cheese
and suits. The labor share in total production costs is 75% for cheese but only 25%
for suits. Show the following:
a. Italy is capital-abundant.
Answer: Because the labor–capital ratio is higher in Spain than Italy (i.e., S/S
b. Suits are capital-intensive.
Answer: Cheese is more labor-intensive than suits because the share of total
c. Under free trade, Italy will export suits.
Answer: The no-trade relative price of suits in Italy is lower than the free-trade
4. Suppose two countries, Greece and Australia, produce wine and wheat using labor
and capital as factors of production. Suppose Greece is capital-abundant and wheat
production is labor-intensive. For each of the following, indicate whether there is an
increase, decrease, no change, or unable to determine as the two countries shift from
no trade to free trade.
Answer:
Greece
Australia
5. Belgium is relatively well endowed with skilled workers compared with China, which
is relatively well endowed with unskilled workers. Assume that the production of
pharmaceutical products intensively uses skilled workers and the production of toys
intensively uses unskilled workers.
a. Which country would you expect to have a higher relative wage in skilled labor
with no trade?
Answer: Belgium has a lower relative wage in skilled labor. This is because
b. Which country has the higher relative price of pharmaceutical products prior to
trading?
c. Under free trade, which country experiences an increase in the relative wage of
skilled workers? Explain.
6. Consider two countries, Xeno and Zilo, engaging in free trade with one another. Each
country uses two factors, capital and labor, to produce two goods, trains and hats.
Assuming that Xeno exports trains and Zilo exports hats, reproduce Figures 4-2, 4-3,
and 4-4 for each country and determine the world relative price of trains in a figure
similar to Figure 4-5.
Answer: See the figures on the following pages.
7. Compare the basis for trade between the Ricardian model and Heckscher–Ohlin
model.
a. List the main assumptions of each model.
Answer: In the Ricardian model, the marginal products of labor are constant
b. How do the assumptions lead to differences in the pattern of trade between
countries in each of the models?
Answer: In the Ricardian model, comparative advantage determines the pattern
8. Consider two countries, Vietnam and China, producing two goods, textile and
televisions. Suppose that textile is relatively labor-intensive. Vietnam has 20 units of
capital and 16 units of labor and China has 300 units of capital and 150 units of labor.
a. Which country is relatively capital-abundant? Explain.
b. Which country will export textile? Explain.
c. In Vietnam, the production of which good decreases under trade? In China?
Answer: In Vietnam, the production of televisions will decrease, whereas the
d. In China, is the relative price of televisions higher under free trade or no trade?
Explain.
e. Which group benefits from trade in China? In Vietnam?
9. Suppose Ireland and Canada produce two goods, Y and X. Assume that good Y is
labor-intensive and good X is capital-intensive.
Given the above PPFs, which country is relatively labor-abundant? Capital-
abundant? Explain.
b. Suppose the countries have identical preferences. Show the no-trade equilibrium
and the free-trade equilibrium. Be sure to label the production and consumption
points for both economies.
c. Which good will Ireland export? What about Canada? Explain.
d. Compare the relative factor prices in the two countries before and after trade.
e. Comment on the overall welfare in both countries.
10. “Professionals and highly educated workers are more likely to oppose limits on free
trade, as compared with high-school–educated workers, because they have a better
understanding of international trade.” Comment.
11. Suppose two countries, France and Germany, use only capital and labor for
production. France has 2,050 units of capital and 916 units of labor, and Germany has
816 units of capital and 270 units of labor. Both countries produce two goods, cars
and wine. In Germany, there are 366 units of capital and 135 units of labor employed
in the wine industry. In France, there are 926 units of capital and 618 units of labor
employed in the wine industry.
a. Which country is labor-abundant? Which country is capital-abundant?
b. Which industry is labor-intensive in Germany? Which industry is capital-
intensive in Germany?
c. Suppose that France and Germany do not engage in international trade. Assuming
the countries have identical preferences, which country would have the cheaper
relative price of wine?
Answer: Without trade, the relative price of wine would be cheaper in France
d. Now suppose the two countries trade with one another. What will happen to the
relative price of wine in France? In Germany?
e. What is the effect of free trade on labor in France? On capital owners in France?
f. What are the effects of free trade on wage and rental on capital in Germany?
g. With the opening of trade, what is most likely to occur in terms of the production
of cars in France? In Germany?
