Question

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 mobility across industries

c). Factor mobility across countries

d). Constant returns to scale.

e). Perfect competition.

2. In the Heckscher Ohlin model, whether an individual gains or loses from trade

a). depends on the product he/she produces

b). depends on the industry he/she works in

c). depends on the inputs (factor of production) he/she supplies to the economy

d). depends on which firm you work for

Answer 1

Answers:

c.   Factor mobility across countries

Resources and labor may be reinvested and re-employed within countries to create various outputs. Similar to the comparative advantage argument put forward by Ricardo, this is presumed to happen without cost. If the two technologies of production are the arable industry and the fishing industry, farmers are believed to be able to move to work as fishermen at no expense, and vice versa. It is further presumed that capital can easily move into either technology, so that the industrial mix can alter without cost of adjustment between the two production forms. For example, if the two industries are farming and fishing it is presumed that farms can be sold without transaction costs to pay for the construction of fishing boats. Avsar 's hypothesis has received a lot of criticism for this.

The basic Heckscher – Ohlin model based on the local availability of international level differing capital and labour, but if capital can be invested freely anywhere, competition (for investment) makes relative abundances worldwide identical. Free exchange in capital effectively offers a common pool of worldwide investment. With the reduction of capital controls, the modern world has started to look much less like the world modelled by Heckscher and Ohlin. Capital mobility is argued to undermine the case for free trade itself, see: Capital mobility and comparative advantage Free trade criticism. just Like capital, labor movements in the Heckscher – Ohlin world are not allowed(factor immobility between countries), since this would force an equalization of the relative abundances of the two forces of output, just as in the case of capital immobility. This condition is more defensible than the assumption that capital is confined to a single country, as a description of the modern world.

c). depends on the inputs (factor of production) he/she supplies to the economy

To put it another way, some will gain from trade, some will lose, but the net effects are still dependent on fector of endowment to define relative abundance between countries. Marginal productivity, which in turn depends on the output prices of the winnings sum of the goods, will exceed the losses to the losers. in heckscher -ohline model, who will loose and gain is depend of factor of endowment.