Consider a Heckscher-Ohlin Model with two countries, Home and Foreign, and two p

Question

Consider a Heckscher-Ohlin Model with two countries, Home and Foreign, and two production function factors, labor and capital. Resource endowment is as described in the table below. There are two goods, computers and shoes where computers are capital-intensive while shoes are labor-intensive. Answer following questions. Capital 100 units 50 units 60 units Labor Home Forei 50 units 1.5 Home exports and Foreign exports (a) shoes; computers (b) computers; shoes 1.6 After opening up to trade, increases at home and increases at foreign. (a) wages; capital rental (b) wageswages (c) capital rental; wages (d) capital rental; capital rental 1.7 The theoretical prediction in 1.6 is called (a) the Heckscher-Ohlin Theorem (b) the Stoplper-Samuelson Theorem (c) the Rypzynski Theorem (d) the Factor Price Insensitivity Theorem

Explanation / Answer

1.5) Acc. to Hecscher Ohlin Theorem, a country will export that good which uses its abundant factor intensively and import the good which uses its scarce factor intensively. SO here the home country is relatively abundant in capital and computer is the capital intensive good and the foreign country is relatively abundant in labor and shoe is the labor intensive good.

Thus Home exports computers and Foreign exports shoes.

1.6) After opening of trade, capital rentals increases at home and wage increases in foreign.

1.7) The above theoretical proposition is called Stopler Samuelson Theorem

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