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).


Related Solutions

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. Which of the following is NOT an assumption of the Heckscher Ohlin model? a). Same tastes. b). Factor...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​ (with labor and​ land). Initially, both countries have the same supply of labor ​(100 units​ each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a....
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2...
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions q1 = L10.5K0.5 and q2 = L20.5T0.5 where Li is the labor input in sector i = 1, 2, K is capital, and T is land. a. Suppose there is capital inflow from the foreign country so that K increases. How would this affect the marginal product of labor in sector1. (If you do not...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth and tablet computers. The production of both goods uses capital and labor in fixed proportions, with the tablets industry using more capital per worker than the cloth industry. The units of each input needed to produce one unit output are given by: capital Labor Cloth 1 2 Tablets 2 1 Both countries have 150 units of capital available for production, but the Home country...
Consider two countries, Germany and Italy, which produce two goods, beer and cheese. The labour requirements...
Consider two countries, Germany and Italy, which produce two goods, beer and cheese. The labour requirements (in hours) for producing one unit of these goods in each country are: Beer Cheese Germany aLB = 2 aLC = 3 Italy aLB* = 5 aLC* = 4 Which country has the absolute advantage in the production of beer and which in the production of cheese? (Mark: 0.2) Which country has the comparative advantage in the production of beer and which in the...
Consider two countries: Canada and Sri Lanka. Assume that each can produce only two goods: maple...
Consider two countries: Canada and Sri Lanka. Assume that each can produce only two goods: maple syrup and jaggery. In a single year, Canada can produce 250,000 tons of maple syrup, or 90,000 tons of jaggery. In the same period of time, Sri Lanka can produce 1,000 tons of maple syrup, or 70,000 tons of jaggery. Suppose that both nations are initially in a state of autarky. If Canada were to produce 170,000 tons of maple syrup and 36,000 tons...
Consider two countries, A and B, whose respective industries produce goods qA and qB. Total world...
Consider two countries, A and B, whose respective industries produce goods qA and qB. Total world output of the good is given by Q=qA+qB. There is a world demand given by p=102-Q. Suppose that the cost function for country A is given by CA(qA)=7qA while the cost function in country B is given by CB(qB)=3qB. The production of the good generates greenhouse gas emissions which cause global climate change. Total world emissions are 0.5 per unit of good, such that...
There are two countries, Lilliput and Blefuscu, which produce two goods: cilantro and hummus. In a...
There are two countries, Lilliput and Blefuscu, which produce two goods: cilantro and hummus. In a single year, Lilliput can produce 4,000 tons of cilantro or 4,000 tons of hummus. In the same period of time, Blefescu can produce 500 tons of cilantro or 300 tons of hummus. Show your work as you answer these questions. (e) Prior to trade, Lilliput makes 2,000 tons of cilantro, and Blefuscu makes 300 tons of cilantro. Draw these allocations on separate Production Possibilities...
Two large countries, the US and China, produce only two goods, manufactured goods and Financial services,...
Two large countries, the US and China, produce only two goods, manufactured goods and Financial services, using two factors of production, skilled and unskilled labour. The production of Financial services is relatively skill-labour intensive and manufacturing is unskilledlabour intensive. The US is relatively well endowed with skilled labour, whereas China is relatively well endowed with unskilled labour. Assume that each society's preferences over the two goods are identical. (a) Draw the production possibilities frontier (PPF) for the US. Carefully explain...
Two large countries, the US and China, produce only two goods, manufactured goods and financial services,...
Two large countries, the US and China, produce only two goods, manufactured goods and financial services, using two factors of production, skilled and unskilled labour. The production of financial services is relatively skill-labour intensive and manufacturing is unskilled-labour intensive. The US is relatively well endowed with skilled labour, whereas China is relatively well endowed with unskilled labour. Assume that each society‘s preferences over the two goods are identical. (a) Draw the production possibilities frontier (PPF) for the US. Carefully explain...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT