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111SCENARIO: CHILE AND THE UNITED STATES

Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

(Scenario: Chile and the United States) According to the Heckscher-Ohlin model:

Chilean workers should support U.S.-Chile free trade.

Chilean owners of capital should support U.S.-Chile free trade.

U.S. owners of capital should oppose U.S.-Chile free trade.

Both U.S. and Chilean owners of capital should oppose U.S.-

Chile free trade.

112SCENARIO: CHILE AND THE UNITED STATES

Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

(Scenario: Chile and the United States) According to the Heckscher-Ohlin model:

The United States should export automobiles to Chile.

The United States should export wheat to Chile.

Chile should export automobiles to the United States.  

Chile should import wheat from the United States.

113SCENARIO: CHILE AND THE UNITED STATES

Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production.

(Scenario: Chile and the United States) What is the most important reason why U.S. workers might oppose U.S.-Chile free trade?

Returns to capital in the United States are expected to rise as a result of U.S.-Chile free trade.

Wages in the United States are expected to rise as a result of U.S.-Chile free trade.

Returns to capital in Chile are expected to rise as a result of U.S.Chile free trade.

Wages in the United States are expected to fall as a result of

U.S.-Chile free trade.

114Based on the HO model, what is the result on the real returns to factors of production?

Labor and capital must be used together in production, and there is no room for competition for remuneration.

Capital owners always get the “gains from trade.”

Resources used intensively in export industries (such as labor in China and capital in the United States) will see an increase in their returns, whereas the resources used intensively in import-competing industries will see a decline in their return.  

Poor nations will always get the least returns to their factors of production.

115If Home is capital abundant, then when it begins to freely trade with the rest of the world, the return to capital in Home should _________ and the real wage in Home should _______.

fall; rise

fall; fall

rise; rise

rise; fall

116In the long run, when factors are mobile, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good. This is known as:

the Heckscher-Ohlin theorem.

the Stolper-Samuelson theorem.

the Ricardian model.

the specific-factor theorem.

117The conclusion that international trade will lead to an increase in real earnings of a country's abundant resource is known as:

factor-intensity reversal.

the Heckscher-Ohlin theorem.

Ricardian comparative advantage.

the Stolper-Samuelson theorem.

118The Stolper-Samuelson theorem suggests that, over time, free international trade should lead to:

equalization of real wages across the world.

greater divergences in real wages across the world.

equalization of prices across the world.  

greater divergences in prices across the world.

119If a country is exporting computers, which are capital intensive, what will happen to the rental rate on capital?

It will decrease.

It will stay the same.

It will increase.

Not enough information is given.

120Suppose that the price of shoes (which are labor intensive) has risen by 10%. Then which of the following can you say for sure about Home?

Home wages will rise by more than 10%.

Home rental rates will rise by more than 10%.

Home wages will rise by no more than 10%.

Home rental rates will fall by at least 10%.

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