Tutorial 4
ECON7530
Due: 11am (Brisbane time) – Monday 21/08/2023


Please attempt Questions 1 and 2 and 8 MCQS
Question 1.
Assume 2-country (home and foreign) 2-factor (labor and capital), 2- good (clothing and software)
Heckscher- Ohlin model. Clothing is relatively labor-intensive good. The maximum amount of clothing
home country can produce is 10 and the maximum amount of software home country can produce is 12.
a. Draw the production possibility frontier for home country. (Have the quantity of clothing on the
horizontal axis.
b. If the price of clothing is 2 and the price of software is 4, draw an Iso-value line which gives the
maximum value of production in home country.
c. Using the diagram from parts a) and b) find the production point in home country before trade.
d. Redo parts (a), (b) and (c) when the price of software decreases to 2.

Question 2.
According to the standard Heckscher-Ohlin model with two factors (capital and labor) and two goods,
movement of Syria migrants to Germany would decrease the amount of capital-intensive products
produced in Germany. Discuss whether this is true or false, and explain why.

Question 3.
Discus whether the statement "No country is abundant in everything" is true or false.

Question 4.
In the United States, where Internet services are cheap, the ratio of capital to labor used is higher than that
of capital used in accounting services. But in other countries, where Internet services are expensive and
labor is cheap, it is common to use less capital and more labor than in the US. Can we still say that
Internet services are capital intensive compared to accounting services? Why or why not?

MCQs

1. The following are all assumptions that must be accepted in order to apply the Heckscher-
Ohlin Theory, except for one:
A. countries differ in their endowments of factors of production.
B. countries differ in their technologies.
C. there are two factors of production.
D. one product always requires more machines per worker in its production than does the other product.

2. The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that the
former
A. has only two countries.
B. has only two products.
C. has two factors of production.
D. has two production possibility frontiers (one for each country).
E. None of the above.


3. The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike in the
Ricardian model, it is likely that
A) countries will not be fully specialized in one product.
B) countries will benefit from free international trade.
C) countries will consume outside their production possibility frontier.
D) comparative advantage will not determine the direction of trade.
E) global production will decrease under trade.

4. Which of the following is false (for the Heckscher-Ohlin model)?
A. Differences in technologies could be the source of gains from trade.
B. Some groups may gain and some may lose due to trade.
C. Countries differ in the relative endowment of factor of productions.
D. None of the above.

5. In the 2 factor, 2 good Heckscher-Ohlin model, the production possibility frontier is kinked when
A) a country does not engaged in trade
B) the opportunity cost of production is constant
C) there is no factor substitution in production
D) there are unemployed factor resources
E) transportation cost are very high.

6. In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of ________ will
have a production possibility frontier that is biased toward production of the ________ good.
A) labor; labor intensive
B) labor; capital intensive
C) land; labor intensive
D) land; capital intensive
E) capital; land intensive

7. The Heckscher-Ohlin model assumes that there are two countries, each of which produces two goods
(say manufactures and agriculture) using labor and capital. Which of the following is an additional
assumption of the Heckscher-Ohlin model?
A. The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting in
different “endowments” of capital and labor.
B. One nation has larger quantities of both capital and labor than the other country.
C. Capital is a specific resource in producing manufactured goods, and labor is a specific resource in
producing agricultural goods in each country.
D. Labor and capital can move between countries.

8. In the 2-factor, 2-good Heckscher-Ohlin model, an influx of workers from across the border would
A) move the point of production along the production possibility curve.
B) shift the production possibility curve outward, and increase the production of both goods.
C) shift the production possibility curve outward and decrease the production of the labor-intensive
product.
D) shift the production possibility curve outward and decrease the production of the capital-intensive
product.
E) shift the possibility curve outward and displace preexisting labor.

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