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Question 2. This question helps you review the main elements of the Heckscher-Ohlin model. (24 points, 2 points each) Suppose Sweden and Norway...
Question 2. This question helps you review the main elements of the Heckscher-Ohlin model. (24 points, 2 points each)
Suppose Sweden and Norway produce paper and bread using capital and labor. Paper is capital-intensive and bread is labor intensive. Sweden has 600 workers and 500 units of capital, and Norway has 400 workers and 400 units of capital.
(1). Sweden is abundant in capital.
(2). Norway exports paper and Sweden exports bread under free trade.
For questions (3)-(12), consider the movement from closed-economy to free trade.
(3). The marginal product of labor for the paper industry increases in Norway.
(4). The labor-capital ratio for the bread industry increases in Norway.
(5). The capital owners' standards of living increase in Norway.
(6). w/r increases in Norway.
(7). Swedish workers' real wage for bread increases.
(8). The marginal product of capital for the bread industry increases in Sweden.
(9). In both countries, the capital owners with the exporting goods industry benefit from free trade.
For questions (10) - (12) below, assume that going from no trade to free trade, the price of bread rises by 10% for Sweden, while the price of paper remains unchanged.
(10). The wage of all Swedish workers increases by more than 10%.
(11). The Swedish workers' real wage for bread increases by more than 10%.
(12). The rental rate of capital in Sweden decreases.
