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Recources and Trade: The Heckscher-Ohlin Model

8 important questions on Recources and Trade: The Heckscher-Ohlin Model

What does the relative factor demand show?

It shows the relationship between the w/r and L/K ratio. So how many wage the production of a good uses relative to capital.

What does a higher w/r ratio mean?

It means that wages are higher relative to capital. This will result in a lower L/K ratio. Because wages are high, a firm will use less labor relative to capital, thus the curve will shift to the left.

What will happen if the relative price of cloth rises?

When the relative price of a good rises, the relative wage will also rise, so the w/r ratio will rise. Because labor is now relatively more expensive, the ratios of labor to capital, L/K, in the production of cloth and food would both drop!
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What will happen to the production possibilities frontier if the labor supply increases? (Remember that cloth is relatively more labor intensive)

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Assume a county is labor-abundant. Will it produce more cloth or more food?

Since a country is relatively effective at producing goods that are intensive in the factors with which the country is relatively well endowed, and since cloth requires labor and since this country is well endowed with labor, this country will produce more cloth than food.

What do we mean when we say a country is capital-abundant?

It means the country is well endowed with capital. This country will be relatively effective in capital-intensive production. Remember that this is always in relative terms to other factors of production. This means that a country cannot be abundant in every factor of production.

What is the effect on the purchasing power of a labor-abundant country  when Pc rises?

A rise in Pc means that wages rise in the cloth sector. Since the production of cloth uses relatively much labor, when the w/r ratio rises many people who get their incomes out of labor see their purchasing power grow relative to those who get their incomes from capital.

Explain why the equalization of factor prices is true (in theory!)

When two countries trade goods, they are also trading factors of production in effect. Home lets Foreign use some of its abundant labor (not by selling labor directly, but by exporting goods that use a high ratio of labor to capital). So indirectly Home exports labor to Foreign. We know that importing and exporting equalizes prices in the involved countries, so the prices of labor will converge in the two countries.

Remember however, this is not true in the real world!

The question on the page originate from the summary of the following study material:

International economics : theory & policy | Paul R Krugman, et al

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