Question

Question 4: Heckscher-Ohlin a.) In the real world two countries may dier along several characteristics: production technology, consumer tastes and resources or production factors. In the Heckscher- Ohlin model two countries dier only with respect to one of those characteristics. Which one is it? b.) Given your answer from above, which goods do countries exports in a Heckscher- Ohlin framework? Home and Foreign (*) can produce two goods, food and cloth, and has two factors of production, capital and labor. The production of cloth is capital intensive, the production of food is labor intensive. Home has 2; 000 labor- and 1; 000 machine-hours available (L = 2; 000;K = 1; 000). Foreign's labor force equals 3; 000 labor-hours and its capital stock equals 2; 000 machine-hours (L = 3; 000;K = 2; 000). c.) Which country is relatively abundant in labor? Which country is relatively capital intensive? Given your answer and assuming that free and costless trade is possible between Home and Foreign, which good will be exported by Home, which good will be exported by Foreign? d.) Both countries will gain from trade overall, but are there groups in both countries that will lose from trade? Who will lose in Foreign, who in Home? Are those groups only hurt in the short-run or even in the long-run? Explain brie y.

Answer 1

(a) according to HO theory, two nations trade if their production factors differ, assuming nations tastes, technology to be same.

(b) the problem can be summarised as follows:

labour capital

Home 2 1

Foreign 3 2

the relative amount of capital in home is 1/2(0.5) while in foreign it is 2/3 (0.6). thus, capital is abundant in foreign and labour is abundant in home. thus, home is labour abundant nation and foreign is capital abundant nation. therefore, according to HO theory, foreign should export cloth (capital intensive commodity) while home should export food (labour intensive commodity).

(c) home is relatively abundant in labour while foreign is relatively abundant in capital. thus, according HO theory, a nation should export that commodity whose production requires the input in which that nation is relatively abundant. thus, home should export food while foreign should export cloth.

(d) no doubt, overall both the nations gain but there are some groups in both the nations which will lose. in Home, since it specialises in labpur intensive commodity, it will increase the price of labour i.e. wages, but it will reduce the price of capital thus the owners of capital in home will lose and labour will gain.

on the other hand, in foreign, since it specialises in capital intensive commodity it will increase the demand of capital, increasing its price, while the price of labour will reduce. thus owners of capital will gain in foreign but labour will lose.

(e) yes, it is true for short run only. this s because in the long run, factors would start moving from importing sector to export-oriented sector. factors are freely mobile within nation, thus they would adapt to the price changes in the long run. and hence, they would be hurt only in the short run.