Chapter 4 –The Heckscher-Ohlin and Other Trade Theories
Multiple Choice
1. Which theory states that a nation will tend to export commodities intensive in its relatively abundant and cheap factor?
A)Heckscher-Ohlin theory
B)Stolper-Samuelson theory
C)Product cycle theory
D)Intraindustry trade theory
Answer: A Page: 83
2. Which of the following is a part of the Heckscher-Ohlin model that states international trade will bring about equalization in the returns to homogeneous factors across nations?
A)Factor-price equalization theorem
B)Factor-proportions theory
C)Factor-endowment theory
D)Product cycle theory
Answer: A Page: 85
3. The Heckscher-Ohlin theory is often referred to as:
A)Factor-price equalization theorem
B)Factor-proportions theory
C)Factor-endowment theory
D)Both b and c
Answer: D Page: 85
4. Which of the following states that a nation will export commodities intensive in its relatively abundant and cheap factor and that international trade brings about equalization in returns to homogeneous factors across countries:
A)Heckscher-Ohlin theory
B)Stolper-Samuelson theorem
C)Differentiated product theorem
D)None of the above
Answer: A Page: 83
5. Which of the following states that free international trade reduces the real income of the nation’s relatively scarce factor and increases the real income of the nation’s relatively abundant factor?
A)Heckscher-Ohlin theory
B)Stolper-Samuelson theorem
C)Differentiated product theorem
D)None of the above
Answer: B Page: 87
6. Assume a nation where labor is mobile between industries but capital is not. The specific-factors model states that trade leads to which of the following?
A)An increase in the return to capital used to produce the nation’s export commodity
B)An increase in the return to capital used in the nation’s import-competing industry
C)A decrease in the return to capital used to produce the nation’s export commodity
D)An increase in the return to labor used in the production of both imports and exports.
Answer: A Page: 88
7. Assume a nation where labor is mobile between industries but capital is not. The specific-factors model states that trade leads to which of the following?
A)A reduction in the return to capital used to produce the nation’s export commodity
B)A reduction in the return to capital used in the nation’s import-competing industry
C)An increase in the return to labor used in the production of both imports and exports.
D)Ambiguous outcomes in the return to all capital.
Answer: B Page: 88
8.Which of the following is considered to be a short-run version of the factor price equalization theory?
A)Economies of scale theory
B)Intraindustry trade theory
C)Specific factors theory
D)Product cycle theory
Answer: C Page: 88
9. According to the specific factors trade theory:
A)Owners of factors specific to export industries lose when trade takes place, but owners of factors specific to import-competing industries gain
B)Both owners of factors specific to export industries and owners of factors specific to import-competing industries gain from trade
C)Both owners of factors specific to export industries and owners of factors specific to import-competing industries lose from trade
D)Owners of factors specific to export industries gain when trade takes place, but owners of factors specific to import-competing industries lose
Answer: D Page: 88
10. In his empirical test of Heckscher and Ohlin’s model, Leontief found that
A) the US imported more labor intensive goods and exported more capital intensive goods.
B) the US imported more capital intensive goods and exported more labor intensive goods.
C) the US imported and exported more labor intensive goods.
D) the US imported and exported more capital intensive goods.
Answer: B Page: 90
11. The following are examples of differentiated products:
A)Soft drinks
B)Automobiles
C)Athletic shoes
D)All of the above
Answer: D Page: 94
12. ______________ involves international trade in the differentiated products of the same industry or broad product group.
A)Inter-industry trade
B)Intra-national trade
C)Intra-industry trade
D)None of the above
Answer: C Page: 94
13. The ______________ hypothesizes that a portion of international trade is based on the introduction of new products or processes:
A)specific-factors model
B)technological gap model
C)product cycle model
D)real business cycle model
Answer: B Page: 97
14. Which model states that a nation can shift from being a net exporter of a good to a net importer of the same good?
A)Specific-factors model
B)Technological gap model
C)Product cycle model
D)Real business cycle model
Answer: C Page: 97
15. The product cycle model was introduced by:
A)Wassily Leontief
B)Alfred Marshall
C)Eli Heckscher
D)Raymond Vernon
Answer: D Page: 97
16. Transportation costs include:
A)Freight charges
B)Warehousing costs
C)Costs associated with loading and unloading shipments
D)All of the above
Answer: D Page: 99
17. Which economist laid the foundation for the factor endowment theory with his article entitled “The Effect of Foreign Trade on the Distribution of Income”?
A) Eli Heckscher
B) Bertil Ohlin
C) Alfred Marshal
D) Raymond Vernon
Answer: A Page: 82
18.According to the factor endowment theory, nations heavily endowed with labor will:
A)Import more labor intensive goods
B)Export more labor intensive goods
C)Have an absolute advantage in labor intensive goods
D)Have a comparative advantage in capital intensive goods
Answer: B Page: 83
19. Which of the following states that the difference in relativefactorabundance and relativefactorprices is thecauseof the pretrade difference in relative commodity prices between two nations?
A) Stolper-Samuelson theorem
B) Differentiated product theorem
C) Heckscher-Ohlin theorem
D) None of the above
Answer: C Page: 83
20. Which of the following would least likely apply to the product cycle theory?
A) Digital cameras
B) Coal
C) Televisions
D) Computers
Answer: B Page: 97
21. Assume that Country A is relatively abundant in capital and relatively scarce in land. According to the factor endowment theory, with free trade, the internal distribution of income in Country A will change in favor of:
A)capital
B)land
C)both capital and land
D)neither capital nor land
Answer: A Page: 87
21. Assume the cost of transporting computers from US to Japan is greater than the pre-trade price difference for computers between US and Japan. Trade in computers between US and Japan will:
A) be very profitable for both parties
B) be a breakeven proposition for both parties
C) occur
D) not occur
Answer: D Page: 85
23. For trade to occur, the Heckscher-Ohlin model requires that:
A)Both nations have identical tastes
B)Both nations have exactly the same level of technology
C)Both nations only have broadly similar tastes because the level of technology is not relevant
D)both nations have broadly similar tastesandtechnology
Answer: D Page: 85
24. Mexico is relatively abundant in labor, while Canada is relatively abundant in capital. In both nations, the production of televisions is relatively more capital intensive than the production of corn. According to the factor endowment theory, Mexico will have a(n):
A)absolute advantage in the production of corn and computers
B)absolute advantage in the production of corn
C)comparative advantage in the production of corn
D)comparative advantage in the production of computers
Answer: C Page: 83
25. A product will be internationally trades as long as the pre-trade price differential between the trading partners is:
A) equal to the transportation cost of the good
B) greater than the transportation cost of the good
C) less than the transportation cost of the good
D) none of the above
Answer: B Page: 87
26. Which of the following is not an example of a capital rich nation?
A)Canada
B)Germany
C)India
D)Italy
Answer: C Page: 87
27. Assume both labor and capital are completely mobile, and a nation is capital rich/labor scarce. In order to increase welfare, what kind of trade policy should the government adapt?
A)Restrict all trade, because the standard of living will decline and people will be worse off
B)Only restrict trade that will make the real wage fall, and allow trade that will not affect wages
C)Not restrict trade, because the real wage will eventually cycle back to the pre-trade value, eliminating any losses in the standard of living
D)Not restrict trade, because any decline in real wages will be matched with an even larger gain by those who own capital
Answer: D Page: 88
28. Which of the following are possible sources of bias for the Leontief paradox?
A)Leontief only used a two-factor model
B)Misclassification of factors such as natural resources
C)The inclusion of only physical capital in the measure of capital
D)All of the above
Answer: D Page: 90
29. Which of the following factors were not considered within the framework of the Leontief paradox?
A)Human capital
B)Physical capital
C)Natural resources
D)Both A & C
Answer: D Page: 90
30. In the real world, a reason factor-price equalization of labor does not completely hold true is that:
A)it is unrealistic to assume that there are no trade restrictions
B)although technology among most countries is the same, workers are not able to make efficient use of it in every nation, thus keeping factor prices from equalizing
C)although labor is completely mobile it assumes the value in the country to which it moved and thus has no effect on the overall factor price of that country.
D)None of the above
Answer: A Page: 90
31. With ______________, inputs increase proportionately more than the increase in output.
A)Increasing returns to scale
B)Decreasing returns to scale
C)Constant returns to scale
D)International returns to scale
Answer: B Page: 91
32. With ______________, inputs increase in direct proportion to the increase in output.
A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) international returns to scale
Answer: C Page: 91
33. Some forces that improve upon the inadequacies of the Heckscher-Ohlin model in explaining basis for international trade are:
A)Economies of scale
B)Product differentiation
C)Technological differences
D)All of the above
Answer: D Page: 90
34. With ______________, inputs increase proportionately less than the increase in output.
A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) international returns to scale
Answer: A Page: 91
35. Increasing returns to scale generally exist because of:
A)greater division of labor and labor specialization
B)specialized and productive machinery
C)less and less expensive factors of production
D)Both A and B
Answer: D Page: 91
36. Which of the following is not an element of the product cycle model?
A) The implementation of measures to prevent arbitrage
B) Expansion of production for export
C) The introduction of the product into the domestic market
D) Standardization and beginning of production abroad through imitation
Answer: A Page: 97
37. Which of the following is not an explanation for why high-income and labor-saving products are most likely to be introduced in rich nations?
A) The opportunities for doing so are the greatest in rich nations
B) Poor countries actually prefer products and services associated with being low-income
C) The development of new products requires proximity to markets so as to benefit from consumer feedback in modifying the product
D) There is no need to provide service
Answer: B Page: 97
38. Which of the following economists participated in a 1967 study that found a strong correlation between expenditures on research and development and export performance?
A) Gruber
B) Mehta
C) Vernon
D) All of the above
Answer: D Page: 98
True/False
39. True or False? The Heckscher-Ohlin theory is often referred to as the factor-proportion theory.
Answer: True Page: 83
40. True or False? The Heckscher-Ohlin theory is often referred to as the factor-endowment theory.
Answer: True Page: 83
41. True or False? International trade acts as a substitute for the international mobility of factors of production in its effect on factor prices.
Answer: True Page: 89
42. True or False? Leontief’s empirical findings agreed with the Heckscher-Ohlin trade model which predicts that, as the most capital abundant nation, the U.S. should import labor-intensive products.
Answer: False Page: 90
43. True or False? Increasing returns to scale refer to the production situation where inputs or factors of production grow proportionately more than output.
Answer: False Page: 91
44. True or False? Non-traded goods and services are those that are not traded because of international barriers to entry, such as exorbitant import tariffs.
Answer: False Page: 100
45. True or False? According to the Heckscher-Ohlin model, if country A has a comparative advantage in producing good X, and country B has a comparative advantage in producing good Y, if those countries have similar tastes it is possible for those two countries to reach a higher indifference curve with the introduction of trade.
Answer: True Page: 84
46. True or False? Free international trade will continue to expand until the real wages for the same type of labor in the two nations and the real rate of interest for the same type of capital in the two nations are completely equalized.
Answer: True Page: 87
47. True or False? Labor unions in developed nations are usually against trade restrictions because it impedes their ability to acquire skilled workers that can assist in acquiring additional benefits and wage increases.
Answer: False Page: 87
48. True or False? Low-skilled US labor was in favor of NAFTA because it will inevitably increase the standard of living for the country as a whole.
Answer: False Page: 102
49. True or False? As a result of environmentalist efforts, for the past three decades polluting and dirty industry exports have expanded slower relative to clean industries and their exports.
Answer: False Page: 102
Essay
50. Discuss the major points of the Heckscher-Ohlin theory, the objection to this theory posed by the Leontief paradox, and the counterargument to this objection.
Answer: The H-O theory focuses on the difference in the relative abundance of factors of production in various nations as the most important determinant of the difference in relative commodity prices and comparative advantage. This theory can ultimately be broken down into two theorems, which are the H-O theorem and the factor-price equalization theorem. The H-O theorem says that if a particular factor of production is relatively abundant in one country, the country should produce and export commodities that are heavily dependant on that factor. In turn, this country will likely import those commodities that have factors of production that are relatively scarce within the country itself. The second part of this theory, the factor-price equalization theorem, tells us that similar forms of labor and capital (factors of production) will equalize, in terms of factor prices, as trade between these countries progresses. The objection to this theory came about with the empirical testing done by Leontief in 1951. What Leontief found, which would later become known as the Leontief paradox, was that in the U.S. import substitutes were more capital intensive than U.S. exports. This, of course, contradicts what the H-O theory purports to be the case. However, the ‘paradox’ itself is not without its inadequacies. Instead of considering human capital and natural resources, which are completely legitimate factors of production, they are overlooked. When this transgression is circumvented, and these factors of production considered, the paradox is eliminated.
