INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 4
1. What does the factor proportions theory imply about the composition of a nation’s
exports and imports? Why?
2. Based on the 2 ¥ 2 ¥ 2 factor proportions model, how will the opportunity to trade in a
labor-abundant country affect output prices, returns to factors of production, and a
firm’s demand for capital relative to labor compared to a no-trade situation? Explain
why.
3. “Alpha, a country with abundant capital and scarce labor, initially has completely free
trade with the outside world. If Alpha imposes a tariff on imports, its ratio of wages to
the return on capital will fall.” Do you agree? Why or why not?
4. What role do factor intensities of production play in the factor proportions theory of
trade? If there were no differences in the factor intensities of the goods produced, how
could that affect the predicted pattern of trade?
5. Suppose that Argentina has abundant arable land and scarce labor compared with
Bolivia. Assume that wheat is land-intensive relative to cloth and that the other
Heckscher–Ohlin assumptions of the 2 ¥ 2 ¥ 2 case apply.
a. Show diagrammatically how the production-possibilities curves for the two
countries differ, and explain how that creates the possibility for mutually beneficial
trade between them. What is the sequence of changes that occurs as the two
economies move from no trade to free trade?
b. What groups in each country would you expect to support free trade based on the
H–O model?
c. If there are important transportation costs between these countries, what
differences in the relative price of wheat and the ratio of wages to land rents will
remain in Argentina compared to Bolivia?
d. If Bolivia were completely specialized in cloth production, how would that situation
affect the likelihood that the ratio of wages to rental rates would be equal in the
two countries? Explain which country would have a higher wage–rental ratio.
6. Do you expect those opposing free trade in the short run to differ from those opposing
it over a longer period? If labor and capital become mobile across industries in the
long run, how does that transition affect the impact on a capitalist whose capital initially
is used in an import-competing industry? How does your answer depend upon a
country’s relative factor endowments?
7. Debate how proposals to eliminate British trade barriers on imports of food in the
nineteenth century put landowners in opposition to industrialists. Explain how the
specific factors model helps to indicate the interests of landowners, industrialists, and
labor. In what way are each of these factors tied to the import or export of output? If
labor is the only factor that is mobile between industries, why is the effect of trade
restrictions on labor ambiguous?
8. In which model, the specific factors model or the H–O model, is an increase in the
labor force likely to cause the biggest change in output across sectors of the
economy? What accounts for this difference?
9. If Angola discovers new oil deposits, how does the specific factors model suggest this
development will affect local producers of sandals, an import-competing good?
Suppose you have information about the elasticity of demand for labor in both the oil
extraction sector and the sandal sector. What combination of elasticities will make
contraction of sandal output more likely? Are those the same conditions that result in a
very large increase in the wage rate?
10. In what way would more trade between the E.U. and Sub-Saharan Africa, due to fewer
trade barriers or lower transport costs, reduce the gap in wages between them? How
would that affect the incentive for residents of Sub-Saharan Africa to emigrate (legally
or illegally) to Europe?
11. Suppose the E.U. accepts Ukraine as a member, and the Ukrainians benefit from the
opportunity to trade goods and services freely with other members and to migrate to
any other member state. If trade and factor flows are substitutes, what economic
factors are likely to be relevant in predicting whether trade in goods or movements of
people occurs? How is that distinction relevant in predicting the economic effects on
current member states?
12. What exactly is paradoxical about the so-called Leontief paradox? What explanations
have been offered to account for it or to resolve it?
13. You are given the following information about each country’s share of the world
endowment of a factor and about each country’s share of world income (GNP). Explain
how this information allows you to predict differences in the trade patterns of Japan
and the United States. Indicate whether you expect much trade to occur between
these countries according to the H–O theory.
Country Physical R&D Skilled Semi-skilled Unskilled Arable GNP
capital scientists labor labor labor land
U.S. 33.6% 50.7% 27.7% 19.1% 0.2% 29.3% 28.6%
Japan 15.5% 23.0% 8.7% 11.5% 0.3% 0.8% 11.2%
Entries represent the percentage of the world endowment of a factor accounted for by
each country.
INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 4: Answers
1. The factor proportion theory predicts that a country will export goods that use
intensively the factors in which it is relatively abundant and import goods that use
intensively the factors in which it is relatively scarce. Compared to the rest of the
2. A labor-abundant country will find that trade creates an opportunity to sell labor-
intensive goods at a higher relative price than at home. As firms expand production
of such goods, their demand for labor and capital is met by the resources released
3. A capital-abundant country will import labor-intensive goods, and imposing a tariff
on those goods will result in their relative price rising for domestic producers. As
4. If factor-intensities were the same for both goods, then the PPC would be a straight
line, indicating constant opportunity cost in the production of two goods. The bundle
5. a. For any given ratio of wheat production (horizontal axis) to cloth production
(vertical axis), Bolivia will have a higher relative cost, shown by a steeper slope of
the line tangent to its PPC. If there is a difference in the autarky relative prices of
6. If the short-run effect of a change in trade policy is felt by all factors employed in a
given industry, then in a capital-abundant industrial country both labor and capital in the
labor-intensive import competing industry will oppose free trade. In the long run,
7. The British corn laws reflected the interests of landowners, who were protected by
trade barriers against imported food. As British output of grain rose, and more
workers were employed with a given amount of land, labor productivity fell and a
8. An increase in the labor force will cause a bigger change in the pattern of production in
the H-O model because the labor-intensive industry will expand while the capital-
9. The discovery of new oil deposits in Angola results in an outward shift in the demand
for workers in the oil sector. Each worker will now be more productive with the same
amount of effort, resulting in more oil produced. The oil industry is willing to pay
10. Greater trade between the E.U. and Sub-Saharan Africa would increase demand for
labor in Africa and reduce demand for labor in the E.U., assuming that the E.U. is
11. If Ukraine is relatively abundant in unskilled labor, it will benefit from being able to
export more unskilled labor-intensive goods to the EU If costs of transporting goods
12. Leontieff found that the capital-labor ratio in US production of goods that were
substitutes for US imports was higher than the capital-labor ratio of US exports. This is
13. Based on a comparison of the endowment share versus the GNP share (factor supply
relative to factor demand), the US is relatively abundant in physical capital, human