ECON 340 Lecture 5 Homework Four Exam
With Complete Solutions
Ho model - ANSWER Intuition: Countries differ in their endowments of different factors:
(skilled) labor, physical capital, land etc. Trade happens in order to take advantage of
differences in prices of these factors
Like Ricardian Model, delivers sharp predictions for trade patterns.
Unlike Ricardian Model, also sharp predictions for distributional effects.
Assumptions of the H-O Model - ANSWER 1. Two-country model with Home and
Foreign: same technology and same preferences across countries.
2. Two goods: food and cloth.
3. All markets are competitive.
4. Two factors of production: labor L and capital K.
5. In each country, the amount of L and K is fixed but varies across countries.
6. Both goods produced by combining L and K according to a production function.
7. L and K can be freely reallocated across sectors.
8. The technology for producing cloth is more capital-intensive than
the technology for producing food.
Diminishing Marginal Product - ANSWER When LC increases (given KC), each worker has
less K to work with
, The more LC used in cloth, the lower the increase in output from an increase in LC
The same is true in food production
HO opportunity cost - ANSWER It means that opportunity cost of producing cloth in
terms of food is not constant:
it is low when producing very little cloth and a lot of food.
but high when producing a lot of cloth and little food.
ho Production Possibility Frontier - ANSWER curved
Changing opportunity cost means changing PPF slope.
The higher the ratio of a factor used, the less productive it becomes.
Heckscher-Ohlin Theorem - ANSWER Heckscher-Ohlin Theorem: an economy will export
the good that is intensive in its abundant factor of production and will import the good
that is intensive in its scarce factor of production
Heckscher-Ohlin Theorem gains from trade - ANSWER Just as in Lecture 3, we know
there must be gains from trade.
As in the Ricardian Model, gains come from both production and consumption.
With Complete Solutions
Ho model - ANSWER Intuition: Countries differ in their endowments of different factors:
(skilled) labor, physical capital, land etc. Trade happens in order to take advantage of
differences in prices of these factors
Like Ricardian Model, delivers sharp predictions for trade patterns.
Unlike Ricardian Model, also sharp predictions for distributional effects.
Assumptions of the H-O Model - ANSWER 1. Two-country model with Home and
Foreign: same technology and same preferences across countries.
2. Two goods: food and cloth.
3. All markets are competitive.
4. Two factors of production: labor L and capital K.
5. In each country, the amount of L and K is fixed but varies across countries.
6. Both goods produced by combining L and K according to a production function.
7. L and K can be freely reallocated across sectors.
8. The technology for producing cloth is more capital-intensive than
the technology for producing food.
Diminishing Marginal Product - ANSWER When LC increases (given KC), each worker has
less K to work with
, The more LC used in cloth, the lower the increase in output from an increase in LC
The same is true in food production
HO opportunity cost - ANSWER It means that opportunity cost of producing cloth in
terms of food is not constant:
it is low when producing very little cloth and a lot of food.
but high when producing a lot of cloth and little food.
ho Production Possibility Frontier - ANSWER curved
Changing opportunity cost means changing PPF slope.
The higher the ratio of a factor used, the less productive it becomes.
Heckscher-Ohlin Theorem - ANSWER Heckscher-Ohlin Theorem: an economy will export
the good that is intensive in its abundant factor of production and will import the good
that is intensive in its scarce factor of production
Heckscher-Ohlin Theorem gains from trade - ANSWER Just as in Lecture 3, we know
there must be gains from trade.
As in the Ricardian Model, gains come from both production and consumption.
