Question

Suppose when Japan opens to trade, it imports rice, a labor intensive good.

1. According to the Heckscher–Ohlin theorem, is Japan capital abundant or labor abundat? Explain.
2. What is the impact of opening trade on the real wage in Japan?
3. What is the impact of opening trade on the real rental rate on capital?
4. What does the Heckscher Ohlin model assume about labor mobility across industries? Across countries?
5. Which group (capital owners or workers) would support policies to limit free trade? Why?

Answer 1

Suppose when Japan opens to trade, it imports rice, a labor intensive good. So, according to the Heckscher–Ohlin theorem, Japan is a Capital abundant Country. This is because a capital abundant country exports capital intensive good and imports labour intensive good.

When trade opens in Japan, it imports labour intensive good (rice) and hence there is no production of rice and hence labour is not required. So due to the decrease in demand for labour the wage rate will fall down, so real wage decreases.

Since Japan will export capital intensive good, hence demand for capital will increase in Japan and hence the real rental rate of capital will rise or increase.

Heckscher-Ohlin model assumes that, there exists perfect mobility of factors of production within each country across industries, but international mobility is not possible.

The policy to limit free trade will be supported by the workers, this is because they are facing loss due to free trade due to very low wages and non availability of works.