Chapter 4: Trade and Resources: The Heckscher-Ohlin Model

1. This problem uses the Heckscher-Ohlin model to predict the direction of trade.
Consider the production of handmade rugs and assembly line robots in Canada
and India.
a. Which country would you expect to be relatively labor-abundant, and which is
capital-abundant? Why?
b. Which industry would you expect to be relatively labor-intensive, and which
is capital-intensive? Why?
c. Given your answers to (a) and (b), draw production possibilities frontiers for
each country.
Assuming that consumer preferences are the same in both countries, add
indifference curves and relative price lines (without trade) to your PPF graphs.
What do the slopes of the price lines tell you about the direction of trade?
d. Allowing for trade between countries, redraw the graphs and include a “trade
triangle” for each country. Identify and label the vertical and horizontal sides of
the triangles as either imports or exports.

3. Suppose there are drastic technological improvements in shoe production at

Home such that shoe factories can operate almost completely with computer-
aided machines. Consider the following data for the Home country:
Computers: Sales revenue = PCQC = 100
Payments to labor = WLC = 50
Payments to capital = RKC = 50
Percentage increase in the price = ∆PC/PC = 0%
Shoes: Sales revenue = PSQS = 100
Payments to labor = WLS = 5
Payments to capital = RKS = 95
Percentage increase in the price = ∆PS/PS = 50%
a. Which industry is capital-intensive? Is this a reasonable question, given that
some industries are capital-intensive in some countries and labor-intensive in
others?

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b. Given the percentage changes in output prices in the data provided, calculate
the percentage change in the rental on capital.
c. How does the magnitude of this change compare with that of labor?
d. Which factor gains in real terms, and which factor loses? Are these results
consistent with the Stolper-Samuelson theorem?

6. Suppose when Russia opens to trade, it imports automobiles, a capital-intensive

good.
a. According to the Heckscher-Ohlin theorem, is Russia capital-abundant or
labor-abundant? Briefly explain.
b. What is the impact of opening trade on the real wage in Russia?
c. What is the impact of opening trade on the real rental on capital?
d. Which group (capital owner or labor) would support policies to limit free trade?
Briefly explain.

7. In Figure 4-3, we show how the movement from the no-trade equilibrium point
A to a trade equilibrium at a higher relative price of computers leads to an
upward-sloping export supply, from points A to D in panel (b).

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a. Suppose that the relative price of computers continues to rise in panel (a), and
label the production and consumption points at several higher prices.
b. In panel (b), extend the export supply curve to show the quantity of exports at
the higher relative prices of computers.
c. What happens to the export supply curve when the price of computers is high
enough? Can you explain why this happens? Hint: An increase in the relative
price of a country’s export good means that the country is richer because its terms
of trade have improved. Explain how that can lead to fewer exports as their price
rises.