International Economics by Dean Appleyard 9th Edition-Test Bank

International Economics by Dean Appleyard 9th Edition-Test Bank

CHAPTER 9
EMPIRICAL TESTS OF THE FACTOR ENDOWMENTS APPROACH

A. Essay Questions

1. How can it be said that the factor-content approach “reveals” a country’s factor abundance? What assumptions seem crucial for making this inference? Explain.

Answer: A country with positive net exports of the services of a given factor must be relatively abundant in that factor (i.e., it is “revealed” to be so), and a country with negative net exports (i.e., positive net imports) of the services of a given factor must be relatively scarce in that factor.

Difficulty: 02 Medium
Topic: More Recent Tests of the Heckscher-Ohlin Theorem
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 09-03

2. The text notes that, if demand reversal were the cause of the Leontief paradox, then labor would be relatively cheap in the United States. Explain the reasoning behind this statement.

Answer: Demand reversal implies that the U.S. has a relative preference for capital-intensive goods; this translates into a relatively low price for labor-intensive goods and hence low wages.

Difficulty: 01 Easy
Topic: Initial Explanations for the Leontief Paradox
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 09-02

3. If economists wish to determine relative factor abundance across countries, why don’t they simply calculate w/r ratios across countries and then compare these ratios?

Answer: The price definition of relative factor abundance may be inaccurate if distortions (e.g., unions) to market prices exist.

Difficulty: 01 Easy
Topic: The Leontief Paradox
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 09-01

4. The European Union has heavily protected its farm sector through import duties; in addition, the Union subsidizes its exports of agricultural products. If “cropland” is regarded as a factor of production and is included in the Leontief statistic (along with, say, labor), how would the presence of these agricultural policies affect the results of such tests? Explain.

Answer: The EU would appear to be a cropland-abundant economy.

Difficulty: 02 Medium
Topic: Initial Explanations for the Leontief Paradox
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 09-02

5. If factor-intensity reversals were indeed prevalent in the real world, how might this fact be used to explain the Leontief paradox? If this explained the paradox, would it suggest that any given U.S. trading partner stood a better chance of conforming to Heckscher-Ohlin than did the United States (i.e., will a factor intensity reversal yield “incorrect” H-O results for both countries)? Why or why not?

Answer: If it is hypothesized that the United States has a relative preference for capital-intensive goods and that U.S. trading partners have relative preference for labor-intensive goods, then the U.S. demand for capital-intensive goods bids up the price of those goods until the U.S. comparative advantage lies in labor-intensive goods. With factor-intensity reversal (FIR), it is not possible to specify unambiguously which good is capital intensive and which is labor intensive, and the Heckscher-Ohlin theorem can be valid for only one of the two countries.

Difficulty: 03 Hard
Topic: Initial Explanations for the Leontief Paradox
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 09-02

6. Why can it be suggested that the fact that the ratio of skilled labor/unskilled labor has risen in almost all U.S. industries in recent years (and not just in traded goods industries) lends support to the view that increased inequality in the United States is not primarily due to increased Heckscher-Ohlin-type trade? How might you counter this suggestion?

Answer: If the increased inequality were purely a trade phenomenon, the fall in the relative price of unskilled labor would cause the nontraded goods industries to substitute toward the use of relatively more unskilled labor, which is the opposite of what has happened. A countering argument would note that an important factor in reducing the demand for unskilled labor is the rise in “outsourcing” by U.S. firms. The point here is that firms are increasingly shipping abroad their component and intermediate-input production that is relatively unskilled-labor-intensive in nature, and this can also put downward pressure on the wages of U.S. low-skilled labor.

Difficulty: 02 Medium
Topic: Heckscher-Ohlin and Income Inequality
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 09-04