Topics Covered: Heckscher-Ohlin Model Part I and II
1. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Consider the production of hand-made rugs and assembly line robots in Canada and India. Problem 1 Answer
a) Which country would you expect to be relatively labor-abundant? Capital-abundant? Why? Labor-abundant: India. Capital-abundant: Canada
b) Which industry would you expect to be relatively labor-intensive? Capital-intensive? Why? Handmade rugs: labour-intensive. Assembly line robots: capital-intensive c) Given your answers to (a) and (b), draw representative 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? If you plot hand-made rugs on the X axis and robots on the Y axis, then the production possibilities frontier for India should be skewed towards the handmade rug axis whereas the production possibilities frontier for Canada should be skewed towards the assembly line robot axis. Also, the autarky relative price line should be flatter in India reflecting a lower relative price of hand-made rugs in autarky in India. India has a comparative advantage in handmade rug production since handmade rugs are cheaper in India and by a similar argument we can claim that Canada has a comparative advantage in assembly line robot production. Therefore, India would export hand-made rugs after opening to trade and Canada would export robots. 2.“Singapore in 1965 was a low-skill labour abundant country compared to the rest of the world and exported low skill labour intensive goods like garments. Singapore’s leader Lee Kuan Yew placed a great emphasis on education. Then 25 years later, in 1990 Singapore started exporting high skill labour-intensive computer parts and importing garments.” How would...
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