IBU5IBE

International Business
Activities (Class 4)

True/False Questions
1. The Heckscher-Ohlin (HO) Model is an economics model that explains trade
across countries based on comparative advantages that arise from differences in
technology across nations.
True or False? Explain.

For the following question suppose we are in a HO world with two goods (one of
them is automobiles), two countries (one of them is Russia) and two production
factors, capital and labour. When Russia opens to trade, it imports automobiles, the
capital-intensive good.
2. According to the HO theorem Russia is labour-abundant. True or False? Explain.

3. Consider two countries and two production factors: labour and capital. Country 1
has much more labour than country 2. Then, Country 1 is labour abundant and
country 2 is capital abundant.
True or False? Explain.

4. According to the Heckscher-Ohlin Model one product can be capital intensive in

one country and labour intensive in another.
True or False? Explain.

Question 5
Assume a Heckscher-Ohlin model of trade. Australia (AUS) and New Zealand (NZL)
produce paper (P) and carpets (C) using two factors, capital (K) and labour (L), that
are mobile across sectors. Paper production is capital intensive and carpet weaving is
labour intensive. Further, Australia has 120 units of labour and 120 units of capital,
while New Zealand has 100 units of labour and 80 units of capital. The cost of labour
is w. The cost of capital is r.

a) Which country is capital abundant relative to the other country? Explain why.

1
b) In the diagram below, draw the relative supply of paper/ carpets for each
country in autarky. Explain any difference across countries.

PP/PC

RDAUS=RDNZL

QP/QC

Now, suppose Australia and New Zealand are free to trade.

c) In the graph in point b) mark the relative price under free trade. Describe the
patterns of trade.
d) Assume the following PPF for Australia. Isoline Z represents the PPF slope at
equilibrium point of production in autarky. Under free trade relative prices change as
the country adopts world relative prices. Considering the following options after free
trade: isoline X or isoline Y, what line is the most likely new equilibrium in Australia
after opening to free trade? Briefly explain.

QC
X

QP

2
Now, suppose that paper production gives off large quantities of toxic bleach, which
dumped into rivers creates localised water pollution.
e) Moving from autarky to free trade what happens to water pollution in New
Zealand and Australia? Use the diagram below in order to explain your answer.