Question

Please answer ALL of the following questions!

1. Suppose China is rich in unskilled labor relatively to Japan. Then, according to the Heckscher=Ohlin model, China tends to export (a. high-tech goods/ b. low-tech goods) to Japan and a trade with China benefits (a. unskilled labor/ b. skilled labor/ c. capital owner) of Japan.

2. Wage rates across countries tend (a. to be equalized only if/ b. to be equalized whether or not) trade barriers and technology gaps are absent. When Japan imports low-technology goods and export high-technology goods, a rise in the relative price of imports of Japan tends to (a. increase/ b. decrease/ c. not affect) its skilled-labor wage/ unskilled-labor wage ratio and (a. increase/ b. decrease/ c. not affect) its welfare.

3. The Leontief Paradox comes from the fact that the US exported (a. capital/ b. labor/ c. technology) intensive goods. The paradox can be explained by (a. complete specialization/ b. productivity difference/ c. no output price convergence).

4. If China’s growth worsens her terms of trade, it will (a. always hurt/ b. sometimes hurt/ c. always benefit) her trading partners, and will (a. always hurt/ b. sometimes hurt/ c. always benefit) herself.

5. Since the welfare effects of import tariffs and export subsidies are clear cut, home country’s tariffs should be (a. always welcome/ b. sometimes welcome/ c. never welcome) to home citizens rather than its export subsidies, which is (a. always welcome/ b. sometimes welcome/ c. never welcome) to foreign citizens.

　Foreign aid (a. increases/ b. reduces) its donor country’s purchasing power and leads to a (a. rise/ b. decline) of her export goods price, if the country is (a. large/ b. small) and has a home bias for the export goods. On the other hand, if foreign aid decreases a recipient country’s export price, it (a. always hurt/ b. sometimes hurt/ c. always benefit) the country.

Answer 1

1. b) low tech goods.

H-O Model states that a country trades and produces the good in which they have absolute advantage in production. Here, China is rich in un-skilled labour and thus would produce low tech goods.

a) unskilled labour

Exports from China would increase the wage rates in the world economy. As, a result this change would benefit unskilled labour in Japan too.

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2. a) to be equalised

H-O Model assumes that both the countries involved in trade are identical except for the differences in endowments. So, wage rates will be equal when trade barriers and technology are similar.

a) increase

To be in equilibrium MPLl/Pl = MPLh/ Ph. So when relative prices increase the relative wage rates too increase.

and a) increase its welfare.

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3. US exported b) labour intensive goods.

The paradox can be explained by b) productivity difference.

Wassily Leontief conducted first empirical test of the HO Theory. 1947 input output table was used for the same and the HO Theory was contradicted leading to Leontief Paradox.

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4. The terms of trade worsens when import prices rise relative to export prices. Exports are cheaper and imports are expensive. The trade will become expensive for China.

S, it will c) always benefit her trading partners and a) will always hurt herself.

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5. c) sometimes welcome

Tariffs are imposed on imports leading to increase in prices of imports. Citizens have to spend more for that good so they would not be satisfied with imports. But sometimes imports lead to high competition for the domestic producers. Thus, rise in prices of imports would lead to fall in its demand and thus beneficial for domestic producers.

a) always welcome

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6. A donor indulges in foreign aid to benefit its exports with the recipient country.

a) increases, a) rise.

a) always hurt.

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