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International Economics, 8e (Husted/Melvin)
Chapter 4 The Heckscher-Ohlin Theory
4.1 Multiple-Choice Questions
1) According to the Heckscher-Ohlin (HO) model the source of comparative advantage is a
country’s
A) technology.
B) advertising.
C) factor endowments.
D) Both A and C.
Answer: C
2) The HO model rules out the classical model’s basis for trade by assuming that ________ is
(are) identical between countries.
A) factor endowments
B) factor intensities
C) technology
D) opportunity costs
Answer: C
3) If tastes are identical between countries, then comparative advantage is determined by
A) supply conditions only.
B) demand conditions only.
C) supply and demand conditions.
D) Can’t tell without more information.
Answer: A
4) The HO theorem states that a country will have comparative advantage in the good whose
production is relatively intensive in the ________ with which the country is relatively abundant.
A) tastes
B) technology
C) factor
D) opportunity costs
Answer: C

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Answer the question(s) below based on the following diagram of a country that is in international
trade equilibrium.

5) Refer to the figure above. This country has comparative advantage in
A) X.
B) Y.
C) both X and Y.
D) Can’t tell without more information.
Answer: A
6) Refer to the figure above. This country’s exports equal
A) CE units of X.
B) GH units of Y.
C) CD units of X.
D) DE units of Y.
Answer: C
7) Refer to the figure above. This country’s imports equal
A) CE units of X.
B) GH units of Y.
C) CD units of X.
D) DE units of Y.
Answer: B
8) Refer to the figure above. Which of the following is true?
A) This country is completely specialized in the production of X.
B) This country consumes at point F.
C) The value of this country’s consumption equals the value of its production.
D) None of the above.
Answer: C

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9) Refer to the figure above. If Y is labor intensive then according to the HO theory, this country
should be ________ abundant.
A) capital
B) labor
C) both capital and labor
D) Can’t tell without more information
Answer: A
10) Refer to the figure above. If this country is labor abundant, then according to the HO theory
good X should be ________ intensive.
A) capital
B) labor
C) both capital and labor
D) Can’t tell without more information
Answer: B
11) One of the predictions of the HO model is that
A) countries with different factor endowments but similar technologies and preferences will have
a strong basis for trade with each other.
B) countries will tend to specialize, but not completely, in their comparative advantage good.
C) reciprocal demand leads to an equilibrium terms of trade by inducing changes in both demand
and supply.
D) All of the above.
Answer: D
12) According to the Rybczynski theorem, at constant world prices, if a country experiences a
gain in its capital stock it will produce
A) more of the capital intensive good and less of the labor intensive good.
B) more of both goods.
C) less of the capital intensive good and more of the labor intensive good.
D) less of both goods.
Answer: A
13) According to the factor price equalization theorem, if A is labor abundant, then once trade
opens
A) wages and rents should fall in A.
B) rents and rents should rise in A.
C) wages should rise and rents should fall in A.
D) wages should fall and rents should rise in A.
Answer: C

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14) According to the factor price equalization theorem, if B is labor abundant, then once trade B
begins with A
A) wages and rents should fall in A.
B) rents and rents should rise in A.
C) wages should rise and rents should fall in A.
D) wages should fall and rents should rise in A.
Answer: D
15) According to the factor price equalization theorem, the ________ factor should oppose free
trade policies in any given country.
A) abundant
B) scarce
C) neither
D) Can’t tell without more information
Answer: B
16) Let Kj and Lj denote the capital and labor stocks of country j (j = A,B), then A is said to be
capital abundant relative to B if
A) KA > KB.
B) KA/LA > KB/LB.
C) LA < LB.
D) All of the above.
Answer: B
17) Let Kj and Lj denote the capital and labor inputs in the production of good j (j = S,T), then S
is said to be capital intensive relative to T if
A) KS > KT.
B) KS/LS > KT/LT.
C) LS < LT.
D) All of the above.
Answer: B
18) According to the HO model,
A) everyone automatically gains from trade.
B) the gainers from trade outnumber the losers from trade.
C) the scarce factor necessarily gains from trade.
D) None of the above.
Answer: B
19) The HO model assumes that ________ are identical between countries.
A) tastes
B) technology sets
C) factor endowments
D) Both A and B
Answer: D
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20) The assumption of increasing opportunity costs in the HO model increases the likelihood that
A) there will be incomplete specialization in production after trade begins.
B) countries will be better off with free international trade.
C) countries will maximize their standards of living from free international trade.
D) All of the above.
Answer: A
21) The HO model predicts that once trade begins factor prices will equalize between countries.
This result occurs because of the assumption of
A) identical technology sets available to each country.
B) constant opportunity costs.
C) one factor of production.
D) free international mobility of factors.
Answer: A
22) Suppose that there are two factors, capital and land, and that the United States is relatively
capital abundant while Canada is relatively land abundant. According to the HO model,
A) Canadian landowners should support Canada-U.S. free trade.
B) Canadian capitalists should oppose Canada-U.S. free trade.
C) U.S. capitalists should support Canada-U.S. free trade.
D) All of the above.
Answer: D
23) Which of the following is false?
A) International differences in tastes, if sufficiently large, could overturn the comparative
advantage predictions of the HO model.
B) The classical and HO models make similar assumptions about international differences in
technology.
C) The HO model predicts that some groups will be hurt by international trade.
D) Both the classical and the HO models predict that countries gain from international trade.
Answer: B
24) Which of the following is true?
A) In the HO model complete specialization in the production of exports is a likely outcome of
international trade.
B) In the classical model, complete specialization seldom occurs due to the assumption of
increasing opportunity costs.
C) Complete specialization is more likely if opportunity costs change little as the production
point moves closer to either axis.
D) All of the above are true.
Answer: C
25) In the HO model, the production possibility frontier is bowed out due to the assumption of
A) identical tastes.
B) different factor intensities in the production of the two goods.
C) increasing returns to scale.
D) Two of the above.
Answer: B
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26) Which of the following is a critical element of the Heckscher-Ohlin model?
A) That different goods display different factor intensities in their production.
B) That some countries have no comparative advantage in anything.
C) That trade may not be beneficial.
D) All of the above.
Answer: A
27) Which of the following is true about the distribution of income in the U.S. in the last three
decades?
A) For much of this period real wages paid to college graduates have risen significantly.
B) Real wages paid to blue-collar workers have grown only slightly.
C) There has been a shift in the distribution in income across various segments of the economy,
with the real earnings of the richest in America rising to record levels.
D) All of the above are true.
Answer: D
28) Which of the following theorems predicts that trade benefits the abundant factors of a
country and harms the scarce factors?
A) The Stolper-Samuelson theorem.
B) The Rybczynski theorem.
C) The Heckscher-Ohlin theorem.
D) None of the above.
Answer: A
4.2 True or False Questions
1) Country A is labor abundant relative to country B if it has a larger labor force than B’s.
Answer: FALSE
2) According to the Rybczynski theorem, if a country increases its endowment of capital and
prices remain constant, then its output of both the capital and labor intensive goods will rise.
Answer: FALSE
3) Tastes are assumed to be identical across countries to rule out differences in demand
determining the direction of trade.
Answer: TRUE
4) Both the classical and the HO model predict that the pattern of trade is determined largely by
international differences in factor endowments.
Answer: FALSE
5) The assumption that the two goods are made using different factor intensities raises the
likelihood of incomplete specialization after trade begins.
Answer: TRUE

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6) In the HO model, reciprocal demand leads to an equilibrium price by inducing changes in both
demand and supply.
Answer: TRUE
7) According to the factor price equalization theorem, free international trade will result in wages
equating rents worldwide.
Answer: FALSE
8) If the factor price equalization theorem is true then, eventually, U.S. wages will fall to the
level found today in the least developed countries of the world.
Answer: FALSE
9) According the Stolper-Samuelson theorem, the scarce factor in any given country should
oppose international trade by that country.
Answer: TRUE
10) Even if some people are hurt by international trade, the HO model predicts that free
international trade improves the standard of living for the country as a whole.
Answer: TRUE
11) According to the HO model, countries with different factor endowments but similar
technologies and preferences will have a strong basis for trade with each other.
Answer: TRUE
12) The Heckscher-Ohlin model is an alternative to the classical theory of international trade
that focuses on the factors of production that countries possess.
Answer: TRUE
13) The Heckscher-Ohlin model basically states that countries will specialize and trade those
goods in which they have comparative advantage.
Answer: FALSE

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4.3 Essay Questions
1) France is capital abundant and Italy is labor abundant. Shoes are labor intensive and wheat is
capital intensive. Draw diagrams to illustrate the pre- and post-trade equilibria for each of the
two countries including the production points, the consumption points, the international price,
and the volumes of exports and imports for each. Be sure to identify which country has
comparative advantage in which good. Which factors gain and which lose when trade is opened
between the two countries? Explain carefully.
Answer:
France

France has a comparative advantage in wheat. It will export X FI – V FI units of wheat and import

C FI – V FI units of shoes. Trade benefits owners of capital and hurts labor in France. This occurs
because production has shifted towards the more capital-intensive good thus lowering the
demand for labor and increasing the demand for capital. As a result, wages fall and the return to
capital rises.

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Italy

Italy has a comparative advantage in shoes. It will export X FI – V FI units of shoes and import

C FI – V FI units of wheat. Trade benefits labor and hurts owners of capital in Italy. This occurs
because production has shifted to the labor-intensive good thus increasing the demand for labor
and decreasing the demand for capital. As a result, wages rise and the return to capital falls.

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2) Explain how free international trade tends to lead to factor price equalization under the
assumptions of the HO model? What does this process predict about which groups should be in
favor of or opposed to free international trade?
Answer: Free international trade leads in each country to the expansion in the production of that
country’s comparative advantage good and a contraction in the production of its comparative
disadvantage good. At existing commodity prices there will be an excess demand for the
country’s abundant factor and an excess supply of its scarce factor. This will cause a change in
relative prices in both countries moving each toward the other’s. In the end, because factors are
equally productive across countries (identical technology), prices will be equalized. Therefore,
scarce factors should oppose free trade because it lowers their payments, while abundant factors
should favor free trade.
3) Explain carefully why the assumption of identical technology worldwide eliminates the
classical basis for international trade.
Answer: In the classical model, differences in technology between the two countries lead to
differences in autarky prices. If one were to replace that assumption with the HO assumption of
identical technologies, the autarky prices would be identical, and there would be no reason for
trade to begin between the two countries.
4) Compare and contrast the classical and HO theories of international trade.
Answer: Similarities
Differences
Both predict that trade raises
HO predicts scarce factor loses.
standards of living.
HO predicts incomplete
specialization.
Both predict that trade causes
production of exports to expand HO gives a role for demand in
and importables to contract.
determining the international terms
of trade.
HO assumes identical technology.
HO makes predictions about trade flows.
5) Describe the controversy surrounding the HO model and the widening of the American
income gap.
Answer: Over the past three decades, real wages in America paid to blue collar workers have
only risen slightly whereas real wages paid to college graduates have risen significantly. Many
pundits claim that this income gap has been widening because of international trade, particularly
as the U.S. has increased trade with developing countries such as China. The HO model predicts
that low-skilled wages should fall towards wage rates paid in developing countries.
Some economists have suggested that it is the rapid pace of technological change that has
reduced the demand for low-skilled workers, leading to the reduced wages and employment
levels in this sector. Other economists, such as Paul Krugman, suggest that trade is increasingly
more responsible for expanding the income gap.

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International Economics, 8e (Husted/Melvin)
Chapter 7 Nontariff Barriers and Arguments for Protection
7.1 Multiple-Choice Questions
1) Quotas are government imposed limits on the ________ of goods traded between countries.
A) prices
B) quantity
C) value
D) Either B or C
Answer: D
2) ________ are quotas that lead to a complete elimination of trade.
A) Embargoes
B) Voluntary export restraints
C) Nontariff barriers
D) Orderly marketing agreements
Answer: A
3) Like tariffs, quotas tend to lead to
A) higher prices and reduced imports.
B) increased government revenue.
C) increased consumer surplus.
D) All of the above.
Answer: A
4) The welfare effects of a quota depend, to considerable extent, upon
A) who has the quota license.
B) the size of the quota.
C) elasticities of domestic demand and supply.
D) all of the above.
Answer: D
5) ________ are profits that accrue to whomever has the right to import the quota restricted
good.
A) Quota licenses
B) Quota rents
C) Quota prices
D) None of the above.
Answer: B
6) Tariffs and quotas tend to be similar in their domestic welfare effects
A) if quota licenses are given to foreigners.
B) if quota license are auctioned.
C) if quota licenses are given to domestic firms.
D) Both B and C.
Answer: D
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7) Governments around the world tend to auction quota licenses
A) never.
B) seldom.
C) often.
D) always.
Answer: B
8) A(n) ________ is an example of a quota where foreigners hold quota licenses.
A) voluntary export restraint
B) embargo
C) auction quota
D) All of the above
Answer: A
Answer the question(s) below based on the following diagram.

9) Refer to the figure above. The quota shown in the diagram equals
A) 200 units.
B) 500 units.
C) 1000 units.
D) 1200 units.
Answer: A
10) Refer to the figure above. The quota restricts trade by the same amount as a tariff of
A) $20.
B) $30.
C) $50.
D) Cannot answer without more information.
Answer: B
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11) Refer to the figure above. Quota rents equal
A) $2000.
B) $5000.
C) $6000.
D) $10000.
Answer: C
12) Refer to the figure above. If the government was to auction quota licenses competitively, it
could earn up to
A) $2000.
B) $5000.
C) $6000.
D) $10000.
Answer: C
13) Refer to the figure above. The quota generates deadweight costs of
A) $10,000.
B) $12,000.
C) $30,000.
D) $50,000.
Answer: B
14) Refer to the figure above. If this were a voluntary restraint agreement, the welfare costs to
the importing country would be
A) $14,000.
B) $18,000.
C) $38,000.
D) $60,000.
Answer: B
15) Which of the following is true (assume the small country case)?
A) With a quota, an increase in demand leads to a higher price and more imports.
B) With a tariff, an increase in demand leads to a higher price and more imports.
C) With either a tariff or a quota, an increase in demand leads to a higher price and more
imports.
D) None of the above are true.
Answer: D
16) Which of the following is false?
A) Tariffs and quotas are identical in their effects, if the protected industry is a monopoly.
B) Quotas tend to breed graft.
C) Welfare effects of quotas depend, in part, on who gets the quota rents.
D) Quotas tend to be administrated in an arbitrary fashion.
Answer: A

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17) Export subsidies lead to
A) greater production of exportables and higher internal prices for these goods.
B) greater production of exportables and lower internal prices for these goods.
C) greater production of importables and higher internal prices for these goods.
D) None of the above.
Answer: A
18) Countries like the United States use ________ to offset foreign export subsidies.
A) quotas
B) the escape clause
C) countervailing duties
D) government procurement
Answer: C
19) Which of the following are used as nontariff barriers?
A) health and safety standards
B) government procurement policies
C) domestic content laws
D) All of the above
Answer: D
20) Which of the following is a valid argument for protection?
A) national defense
B) fair trade
C) creation of employment
D) All of the above
Answer: A
21) Which of the following is an invalid argument for protection?
A) redistribution of income
B) infant industry protection
C) preservation of the home market
D) All of the above
Answer: C
22) ________ countries tend to depend on tariffs for a relatively large part of their government
revenue.
A) Developed
B) Developing
C) All
Answer: B
23) Tariffs can be used to redistribute income from
A) abundant factors to scarce factors.
B) consumers to domestic producers.
C) from one country to another.
D) All of the above.
Answer: D
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24) In the case of national defense protection, ________ is a better policy than protection.
A) a production subsidy combined with free trade
B) an income tax
C) direct government provision of infrastructure
D) None of the above is better
Answer: A
25) A production subsidy combined with free trade
A) has the same deadweight costs as a tariff.
B) has only consumption deadweight costs.
C) has only production deadweight costs.
D) None of the above.
Answer: C
26) The United States bans most imports from all of the following countries except
A) China.
B) Cuba.
C) North Korea.
D) Iran.
Answer: A
27) Quotas that entirely eliminate trade in a certain product or a number of products are known
as
A) export tariffs.
B) deadweight.
C) ultimate tariffs.
D) embargoes.
Answer: D
28) The argument that developing countries with lax environmental standards will attract foreign
manufacturers who want to escape stricter standards in their own countries is known as
A) the pollution havens hypothesis.
B) the escape clause hypothesis.
C) the earth destruction hypothesis.
D) the environmentally destructive hypothesis.
Answer: A
7.2 True or False Questions
1) Higher protection raises the overall level of employment.
Answer: FALSE
2) Tariffs and quotas are essentially identical in their effects.
Answer: FALSE

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3) While tariff levels have been falling over the past several decades, nontariff barriers have been
used increasingly.
Answer: TRUE
4) The welfare effects of quotas depend, to some extent, on who has the right to import the quota
restricted goods.
Answer: TRUE
5) The most commonly expressed arguments for protection tend to be largely invalid.
Answer: TRUE
6) A less costly alternative to protection of national defense industries would be a production
subsidy.
Answer: TRUE
7) Quotas redistribute income from consumers to domestic producers.
Answer: TRUE
8) Export subsidies lead to lower prices of exportables for both domestic residents and
foreigners.
Answer: FALSE
9) Voluntary export restraints and quotas are essentially identical in their welfare effects.
Answer: FALSE
10) Strategic trade policy considerations imply that free trade policies should never be pursued.
Answer: FALSE
11) Most tariffs around the world are collected on an ad valorem basis.
Answer: TRUE
12) If the pollution havens hypothesis is true, we should expect world pollution to decline as a
result of international trade and globalization.
Answer: FALSE
13) The argument that developing countries with lax environmental standards will attract foreign
manufacturers who want to escape stricter standards in their own countries is known as the
pollution havens hypothesis.
Answer: TRUE

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7.3 Essay Questions
1) Explain why each of the following is not a valid argument for protection.
(a) patriotism
(b) fair play (e.g. level international playing fields)
(c) preservation of jobs
Answer:
(a) Protection can lower welfare, which would be unpatriotic.
(b) The notion of fair play does not conform well to the real world. Fair play for producers
would be unfair for consumers, etc.
(c) Protection tends to redistribute jobs rather than create new ones.)
2) Are tariffs and quotas equivalent in their economic effects? Demonstrate.
Answer: No. There are government revenue differences. There are differences related to market
dynamics, industrial organization of the protected industry, administration, and the potential for
corruption.
3) Write an essay on the national defense argument for tariffs. Include in your discussion points
in favor of this idea as well as problems with its implementation. Is protection the best policy to
achieve the stated ends? Explain.
Answer: The national defense argument is legitimate in those cases where domestic production
is required. Problems include use in inappropriate situations as well as deadweight costs. A better
policy would be to subsidize domestic production or subsidize imports during peace time.
4) Why do countries impose protection even if it lowers economic welfare? Explain fully.
Answer: Governments may not be interested in maximizing economic welfare. Instead they
have need for revenues, they may want to redistribute income, there may be second best
considerations or national defense reasons, etc.
5) Describe aspects of customs valuation practices that are controversial in the world of
international trade, such as how countries establish import tariffs. Also, how does the WTO
protect against potentially abusive practices when determining appropriate tariffs.
Answer: Countries that seek to provide high levels of protection to local industries and/or want
to increase tariff revenues have often instructed customs officials to use methods that would raise
estimates of the values of imports, such as adding a fixed percentage to the listed price of the
import to cover the cost of freight and insurance. Often practices such as these would lead to
corruption, since importers would seek to cut deals to secure lower valuations and pay lower
tariffs. Article VII of the WTO agreement states that tariff systems must “conform to commercial
realities, and outlaw the use of arbitrary or fictitious customs values.”

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