Question

I have a question that has 3 parts to it and I'm not sure about the answers. Could someone please give me the answers and maybe explain a little as well? Would be greatly appreciated!

Question 1:

Part A)

Suppose Home has 500 units of capital and 250 units of labor and Foreign has 1000 units of capital and 3000 units of labor. Which of the following statements is true?

a) Home is more capital abundant than Foreign

b) Foreign is more capital abundant than Home

c) None of the above

Part B)

Suppose to produce a pair of shoes you need 1 unit of capital and 5 units of labor and to produce one unit of a widget you need 2 units of capital and 2 units of labor. Which of the following statements is true?

a) Shoes are more capital intensive than widgets

b) Widgets are more labor intensive than shoes

c) Shoes are more labor intensive than widgets

d) None of the above

Part C)

Which of the following is NOT an assumption of the Heckscher-Ohlin model of trade?

a)Countries differ in endowments

b)Goods differ in factor intensities

c)Preferences are identical across countries

d)Labor is the only factor of production

Answer 1

Question 1:

Part A)

Suppose Home has 500 units of capital and 250 units of labour and Foreign has 1000 units of capital and 3000 units of labour. Which of the following statements is true?

a) Home is more capital abundant than Foreign

b) Foreign is more capital abundant than Home

c) None of the above

A country will be called capital abundant when they have more capital to labour ratio. hence it is the relative abundance, not the absolute abundance. hence the capital-labour ratio will determine which country is abundant in which factor. the higher capital-labour ratio means a country is capital abundant and a lower capital ratio means that country is labour abundant(when compared to each other). it is to be noted that a country with a higher capital-labour ratio will also have a lower labour capital ratio and vice-versa. labour capital ratio is just the reciprocal of the capital-labour ratio.

Home has a capital-labour ratio 500/250=2

foreign has capital-labour ratio 1000/3000=1/3

hence we can see that home has a greater capital-labour ratio i.e. more capital per labour. Home is a capital abundant country and foreign is a labour abundant country.

hence option a is the correct option here.

Part B)

Suppose to produce a pair of shoes you need 1 unit of capital and 5 units of labour and to produce one unit of a widget you need 2 units of capital and 2 units of labour. Which of the following statements is true?

a) Shoes are more capital intensive than widgets

b) Widgets are more labour-intensive than shoe

c) Shoes are more labour-intensive than widgets

d) None of the above

if one good needs more capital per labour in production then it is more capital intensive compared to others. if the good requires more labour per capital then it is a labour-intensive good.

we can see, shoes need one unit of capital per 5 labours hence it needs 0.20 units of capital per labour.

Widgets need one 2 units of capital per 2 units of labour hence it needs 1 unit of capital per labour.

hence widget is a capital intensive good compared to shoes.

on the other hand, shoes need 5 labours per 1 capital, hence it needs 5 labour per unit of capital.

widgets need 2 units of labour per 2 units of capital and hence it needs 1 unit of labour per unit of capital.

hence shoes require more labour per capital in production hence it is a labour-intensive product compared to the widgets.

hence option c) is the correct option here.

Part C)

Which of the following is NOT an assumption of the Heckscher-Ohlin model of trade?

a)Countries differ in endowments

b)Goods differ in factor intensities

c)Preferences are identical across countries

d)Labour is the only factor of production

Heckscher Ohlin theory takes assumptions of the a,b and c. but the theory tells us about more than one factor of production. they also take into account the factor of production capital. hence both labour and capital are required to produce a good. hence option d is the correct answer here.

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