Question

The Heckscher-Ohlin model assumes that there are two countries, each of which produces two goods (say manufactures and agriculture) using labor and capital. Which of the following is an additional assumption of the Heckscher-Ohlin model?A. One nation has larger quantities of both capital and labor than the other country.B. Labor and capital can move between countries.C. Capital is a specific resource in producing manufactured goods, and labor is a specific resource in producing agricultural goods in each country.D. The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting in different relative endowments of capital and labor.

Answer 1

Answer:

D. The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting in different relative endowments of capital and labor.

Explanation:

The Heckscher-Ohlin (H-O) model is an international economic theory which states that each country should produce and export what it is most efficient in.

The theory is also referred to as 2x2x2 model because it is employed to assess trade and trade equilibrium between two countries that have different areas of specializations and natural resources.  By implication, the emphasis of the model is that a country should produce and export goods which it has its factors in abundance to produce. A country should produce and export good in which it a relative factor endowment and therefore import goods in which it does not have relative factor abundance.

Assuming there are two factor of production, capital and labor, country X has a relative factor endowment or abundance in labor if the ratio of its quantity of labor to the quantity of capital is higher than that of country Y. Also, country Y also has a relative factor endowment or abundance in capital if its ratio of the quantity of capital to the quantity of labor is higher than that of country X. Therefore, country X should produce a product that uses labor intensively while country Y should produce good that uses capital intensively.

Therefore, an additional assumption of the Heckscher-Ohlin model in the question is option D. The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting in different relative endowments of capital and labor.

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