Question

True or False? Explain.

Use diagrams and/or examples when necessary.

1 If people in Cuba begin to prefer foreign goods, Cuba’s Terms of Trade will fall.

2 According to the Stolper-Samuelson Theorem, an increase in the price of a good leads to an increase in the production of that good and a decrease in the production of the other good.

3 The Leontief Paradox states that in 1947, US exported a lower number of labor- intensive goods and imported a greater number of labor-intensive goods.

4 In the case of many goods traded, a country can improve its comparative advantage if it decreases the value of its currency.

Answer 1

1. True.

Since capital is going out of the country, the Terms of Trade will fall.

2. False.

The Stopler-Samuelson Theorem deals with labour intensive import-competing goods and real wages. It states that if tariffs or some other protectionist policy is put on labour intensive import-competing goods, the particular sector will expand and the capital intensive export oriented sector would contract. This would raise the demand of labour with respect to capital and hence the price of labour (real wages) in the economy.

3. False.

The Leontief Paradox states that even though the United States is a capital abundant country and hence is expected to export capital intensive goods and import labour intensive goods, data suggests that majority of United States imports were capital intensive and exports were labour intensive.

4. True.

Devaluing a currency is a common tactic to keep a country's products competitive on the world market. It helps the country's firms to offer cheaper prices in foreign countries as compared to the foreign country's own domestic sector. China is an example of a country that goes for artificially devaluing their currency to gain comparative advantage.