Question

Suppose that a Home country is a labor-abundant country, and produces bananas (labor intensive) and computers (capital intensive). Given all the theory and assumptions of the Heckscher-Ohlin model holds true, answer the following questions:

A). Draw and explain in a graph the free trade equilibrium for Home Country (Remember PPFs? ! Make sure to clearly indicate the production point, the consumption point, and the quantity of exports and imports).

B). In the graph drawn above for question (a), show the effects of a proportional increase in the endowments of labor and capital. Does welfare increase or decrease?

C). One of the justifications for import-substitution strategies is the deterioration of terms of trade. This means that the price of exports falls relative to the price of imports. In the graph for question (a), draw and show a graph how this would be represented. Does welfare increase or decrease?

D) Suppose that Home country is the main exporter of bananas in the world (meaning it is a large country, able to affect world prices), is it theoretically possible that economic growth decreases welfare for Home Country? Explain using a different graph from answers to questions (b) and (c). Be sure you type your answers and draw clean graphs.

Answer 1

The ascent of worldwide worth chains has undermined key presumptions that loaned the hypothesis believability and has undermined the capacity of countries to pick up by establishing modern strategy. The main issue is that the coming of worldwide worth chains and the cutting of the creation procedure have rendered facilitated commerce and government non partiality in industry significantly more important. The basic supposition of the Huckster—Ohlin model is that the two nations are indistinguishable, aside from the distinction in asset blessings. This likewise suggests the total inclinations are the same. The relative plenitude in capital will make the capital-inexhaustible nation deliver the capital-escalated great less expensive than the work bounteous nation and the other way around. when the nations are not exchanging the cost of the capital-escalated great in the capital-bounteous nation will be offered down with respect to the cost of the positive qualities in the other nation the cost of the work escalated great in the work bounteous nation will be offered down with respect to the cost of the positive qualities in the other nation. China is required to fare work administrations covered up in its net fare wicker bin of products. Obviously, China imports American capital and work as imports of merchandise from the United States. On the off chance that these are subtracted from the Chinese fares of work and capital, then China, being a work plentiful nation will send out work administrations and import capital input. International exchange of merchandise as a circuitous or masked method for exchanging elements or variable administrations encapsulated in exchanged crate of products. Hence, when Chinese items are foreign, essentially Chinese workers and capital hardware under the camouflage of imports are entering the United States, much like individuals and gear under a Chinese monster amid the yearly (Chinese) New Year celebration. Not at all like local inhabitants, the hidden Chinese capital and work would not possess any land or devour American merchandise.