Which one of the following is NOT an assumption made in the standard 2x2x2 Hecks

Question

Which one of the following is NOT an assumption made in the standard 2x2x2 Heckscher-Ohlin analysis?

1. A given relative commodity price ratio, say (PX/PY)1, can be associated with more than one relative factor price ratio, e.g., say with (w/r)1 as well as with (w/r)2.

2. The production function for a given good is the same in both countries.

3. Tastes and preferences (i.e., the community indifference curve maps) are identical in the two countries.

4. If a particular good is the relatively labor-intensive good at one set of relative factor prices, then it is also the relatively labor-intensive good at any other set of relative factor prices.

Explanation / Answer

The correct option is 1. A given relative commodity price ratio, say (PX/PY)1, can be associated with more than one relative factor price ratio, e.g., say with (w/r)1 as well as with (w/r)2. While all other assumptions are true. According to the hecksher ohlin analysis a nation exports the good intensive in its relatively abundant meaning can produce efficiently and it will import good intensive in its relatively scarce and expensive factor.

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