International Economics
Additional Solutions to Problem Set 2
T.a.: Paolo D’Imperio
pdimperio@[Link]
Problem. Suppose in the year 2013, Australia had a population of 45 million and its capital stock is
$90,000 million, and the corresponding figure for Malaysia is 30 million and $75,000 million. Answer
the following, on the basis of this information.
Which country is capital abundant and why?
If production of cloth is labor intensive relative to the production of computers, which country
would export cloth, if engaged in trade?
Australia Malaysia
Population: 45mln Population: 30mln
Capital Stock: $90,000 mln Capital Stock: $75,000 mln
Abundance is defined in terms of a ratio not in terms of the absolute quantities.
Abundance is always defined in relative terms, by comparing the ratio of labour to capital in
two countries. Hence, no country is abundant in both labour and Capital.
Capital labour ratio in Australia is =90000/45 = 2000
Capital labour ratio in Malaysia is =75000/30 = 2500
Malaysia has more capital per labour. The greater capital labour ratio of Malaysia shows this
is the capital abundant country.
Australia has the comparative advantage in the production of cloth. The opportunity cost of
producing the cloth by Australia is lower than that of Malaysia.
According to the Heckscher-Ohlin Theorem, Australia has the comparative advantage in the
production of cloth because they are relatively better endowed than Malaysia. Australia would
export cloth to Malaysia.
Problem: Multiple choices questions.
In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the
border would
A) move the point of production along the production possibility curve.
B) shift the production possibility curve outward and decrease the production of the capital-
intensive product.
C) shift the production possibility curve outward and decrease the production of the labor-intensive
product.
D) shift the production possibility curve outward, and increase the production of both goods.
E) shift the possibility curve outward and displace preexisting labor.
If a country produces good Y (measured on the vertical axis) and good X (measured on
the horizontal axis), then the absolute value of the slope of its production possibility
frontier is equal to
A) the opportunity cost of good X.
B) the price of good Y divided by the price of good X.
C) the price of good X divided by the price of good Y.
D) the opportunity cost of good Y.
E) the cost of capital (assuming that good Y is capital intensive) divided by the cost of labor.
In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a
country's ________ factor and will ________ the good that uses that factor intensively.
A) harm; scarce; export
B) harm; abundant; import
C) harm; scarce; import
D) benefit; scarce; import
E) benefit; scarce; export
In the Heckscher-Ohlin model, when two countries begin to trade with each other
A) relative factor prices in the two countries diverge.
B) all factors in one country will gain, but there may be no gains in the other country.
C) benefits from trade are evenly distributed between the two countries.
D) the relative prices of traded goods in the two countries converge.
E) all factors in both countries will gain from trade.
In the Heckscher-Ohlin model, when there is international-trade equilibrium
A) workers in the capital rich country will earn more than those in the poor country.
B) the capital rich country will charge more for the capital intensive good than the price paid by
the capital poor country for the capital-intensive good.
C) the capital rich country will charge less for the capital intensive good than the price paid by the
capital poor country for the capital-intensive good.
D) the relative price of the capital intensive good in the capital rich country will be the same
as that in the capital poor country.
E) the workers in the capital rich country will earn less than those in the poor country.
Assume that only two countries, A and B, exist.
Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.