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International Economy and Trade: The Answer to Heckscher-Ohlin Theory

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How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?

The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. Explain.

How does the Leontief paradox challenge the overall applicability of the factor-endowment model?

According to Staffan Linder, there are two explanations of international trade patterns-one for manufacturers and another for primary (agricultural) goods.

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Answers:

1) How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?

Heckscher Ohlin theory states that the immediate cause of international trade is the difference in relative commodity prices caused by differences in relative demand & supply of factors (factor prices) as a result of difference in factor endowments between two countries. Fundamentally the relative scarcity of factors ? the shortage of supply in relation to demand is essential for trade between two regions. Commodities which use large quantities of scarce factors are imported because their prices are high, while those using abundant factors are exported because their prices are low.

Ohlin theory was considered to be superior to the Ricardian theory on the following grounds.

a) Ohlin theory regards international trade as a special case of interregional or inter-local trade as distinct from the classical theory which considers international trade totally different from domestic trade.

b) The Ohlin model takes two factors- labor & capital, while the Ricardian model considers only one factor of production as labor.

c) Ohlin theory regards differences in factor supplies as basic for determining the pattern of international trade while the Ricardian theory does not take note of it.

d) The Ohlin model is considered to be more realistic because it is based on the relative prices of ...

Solution Summary

Heckscher-Ohlin theory is clarified in approximately 800 words.

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International Economics Questions

I would like some assistance in the checking of my answers to my multiple choice questions. I'm not sure about some of my choices and could use a second opinion concerning the answers. Any help is greatly appreciated.

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1. Assume that corn production requires only land and can production requires only labor. The United States can produce either 70 kilograms of corn or 100 cans in an hour. Mexico can produce either 60 kilograms of corn or 20 cans in an hour. Which of the following statements is TRUE?

The United States has more efficient resources for the production of cans than Mexico.

Mexico can produce more corn than the United States.

(selected) Both countries jointly can produce 120 cans and 120 kilograms of corn.

Neither country is better endowed for producing cans.

2. The greatest proof against the factor-proportions theory was the post World War II occurrence of:

U.S. importation of capital intensive goods.

U.S. exportation of capital intensive goods.

Germany's unprecedented wartime debt.

(selected) U.S. importation of labor intensive goods.

3. In the Heckscher-Ohlin model, a decrease in the factors of production required to produce rice and beans would:

Shift the production possibilities frontier for rice and beans outward.

Shift the production possibilities frontier for rice and beans upward.

Shift the production possibilities frontier for rice and beans rightward.

(selected) Shift the production possibilities frontier for rice and beans inward.

4. Which of the following models examines trade based on variations in resource abundance?

(selected) Heckscher-Ohlin theory

Ricardian model

Resource endowment Theory

Gravity model

5. In the Heckscher-Ohlin model, the production possibilities frontier is bowed outward due to which of the following?

(selected) Production resource constraints

Holes in available resources

Decreasing marginal costs

Increasing relative wages

6. Which of the following is NOT a reason why the Ricardian model is not thorough in its assessment of international trade?

Countries are endowed with different resources.

Labor productivity is not important when it comes to international trade.

Trade is partly explained by varying factors of production among trading nations.

(selected) Both labor productivity and resources determine advantages in trade.

7. According to Bowen, Leamer, and Sveikauskas, which of the following is true?

(selected) A nation indirectly exports its most abundant factors of production.

A nation indirectly imports its most abundant factors of production.

A nation directly exports its most abundant factors of production.

A nation directly imports its least abundant factors of production.

8. Which of the following statements regarding the Heckscher-Ohlin model and Ricardian trade theory is TRUE?

Both the Heckscher-Ohlin and Ricardian models are current, relevant, and applicable in explaining world trade patterns.

(selected) The Ricardian model is an excellent simplified introduction to world trade patterns, but the Heckscher-Ohlin model is more relevant in regards to explaining empirical evidence.

The Ricardian model is useless in explaining trade patterns, and the Heckscher-Ohlin theory, though more applicable, is not sufficient for explaining real world trade patterns.

The Ricardian model is extremely useful in analyzing trade patterns, but the Heckscher-Ohlin model is only useful in theoretical applications.

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