MULTIPLE CHOICE B1. Consider a world with two countries (Blue and Red), two fact

Question

MULTIPLE CHOICE

B1. Consider a world with two countries (Blue and Red), two factors (labor and capital) and two goods (A and B).

Consider the following data:

Blue has 300 labor force and 300 capital stock

Red has 450 labor force and 900 capital stock

If good A is labor intensive, good B is capital intensive, and all the assumptions of the Heckscher-Ohlin model hold, under free trade:

(a) Blue will export good A.

(b) Blue will export good B.

(c) both countries will export good A.

(d) trade will not occur between these two countries.

(e) None of the above.

B2. Continuing from Question B1, suppose that the two countries face high barriers to trade, and that the capital owners in both countries are considering lobbying in favor of opening international trade between these two countries. Assume that capital owners’ income is derived solely from the returns to their capital, and capital owners only care about their own income

(a) This would be a good decision from the viewpoint of the capital owners in both countries, since in this model trade is always better than autarky from the capitalists’ perspective.

(b) This would be a bad decision for both groups of capitalists since in this model trade hurts capital and helps workers wherever they live.
(c) This would be a good decision from the viewpoint of capital owners in Red but not in Blue, since international trade helps the capitalists in Red but hurts the capitalists in Blue.

(d) This would be a good decision from the viewpoint of capital owners in Blue, but not in Red, since international trade helps the capitalists in Blue but hurts the capitalists in Red.
(e) None of the above.

Explanation / Answer

1) a is correct

Blue has labor capital ratio of 300/300= 1

Red has labor capital ratio of 450/900= 0.5

Since Blue has higher labor capital ratio Blue will export labor intensive good which is good A.

2) c is correct

Without international trade, capitalists in Blue earns equal amount of what labor earns because the relative supply is same. But with international trade Blue will not produce good Y which is capital intensive, and capitalist's income will decrease.

Similarly capitalists in country Red earn more with international trade due to increase in demand for capital.

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