Question

In: Economics

Consider the typical HO setting: 2 countries, Colombia and Venezuela, produce two goods, manufactures and bread,...

Consider the typical HO setting: 2 countries, Colombia and Venezuela, produce two goods, manufactures and bread, with two factors, capital and labor. Both countries share the same tastes and the same technology. Manufactures’ production is capital intensive. In Colombia there are 200 units of labor and 200 of capital, in Venezuela there are 40 units of labor and 100 of capital.

1. With respect to factor abundancy, which of the following is true

a). Venezuela is both capital abundant and labor abundant, and Colombia is neither.

b). Colombia is both capital abundant and labor abundant, and Venezuela is neither

c). Colombia is labor abundant and Venezuela is capital abundant

d). Colombia is capital abundant and Venezuela is labor abundant

2. In autarky, the wage – rental ratio (w/r) is

a). lower in Colombia than in Venezuela

b). we cannot determine from the information given

c). equal to the free trade w/r in each country

d). the same in both countries

e). higher in Colombia than in Venezuela

3. In free trade,

a). Colombia will export bread

b). Both countries will export and import different varieties of bread.

c). Venezuela will export bread

d). Neither country will want to export bread.

4. Question 3 illustrates

a). The Stolper Samuelson theorem

b). The Heckscher Ohlin theorem

c). The law of one price

d). The Ricardian theorem

Solutions

Expert Solution

Solution:

1. A country is factor abundant in that good, which it is endowned with most relative to other factors. So,

For Colombia, endowment is: labor = 200 units, capital = 200 units

So, labor relative to capital = 200/200 = 1

For Venezuela, endowment is: labor = 40 units, capital = 100 units

So, labor relative to capital = 40/100 = 0.4

As labor relative to capital is higher for Colombia than Venezuela, Colombia is labor abundant and Venezuela is capital abundant. Thus, the correct option is (C).

2. As the preferences for the two nations over the two goods are same, though difference in factor endowment exists, there will be a difference in the autarky prices for two nations. As Colombia is labor abundant, price of labor/price of capital will be lower for this nation. As wage rate, w is the price of labor and rental rate, r is the price of capital, w/r is lower for Colombia as compared to Venezuela. Thus, the correct option is (A).

3. In free trade, Colombia being the labor abundant nation will produce and export the labor intensive good, bread. Similarly, Venezuela being the capital abundant nation will produce and export capital intensive good, manufactures. Thus, the correct option is (A).

4. Question 3 states the principle of trade that the nation should export the factor-intensive good, which that nation is factor-abundant in. This principle abides by the Heckscher-Ohlin model principle. Thus, the correct option is (B).

Rahul Sunny answered 6 months ago

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