3

Chapter Three
Sources of Comparative Advantage
True/False 1. The passage of NAFTA increased both U.S. textile exports to Mexico
and textile imports to the U.S. from Mexico.
Ans: True
Dif: E 2. The Heckscher-Ohlin model extends the theory of competitive advantage
by comparing the availability and use of production factors in two nations.
Ans: True
Dif: E 3. Country A has 700 units of capital and 700 units of labor. Country B
has 1000 units of capital and 1000 units of labor. Country B is relatively
more capital abundant than Country A.
Ans: False
Dif: M 4. The production of 100 gallons of milk in a country requires 10 units
of labor and 5 units of capital. The production of 100 pounds of beef
requires 2 units of labor and 5 units of capital. Beef is the more capital
intensive product.
Ans: True
Dif: E 5. Country C has 500 units of capital and 600 units of labor. Country D
has 1100 units of capital and 1400 units of labor. Country D is relatively
more capital abundant than Country C.
Ans: False
Dif: M 6. A capital intensive good or service is one that requires more labor
units to produce than capital units.
Ans: False
Dif: E 7. Under the Heckscher-Ohlin theorem a good may be capital intensive in
one country and labor intensive in another country, resulting in a
motivation for international trade.
Ans: False
Dif: M 8. Residents of a nation that is labor abundant will pay a higher price
for capital intensive goods than for labor intensive goods under autarky
than residents of another country that is labor intensive.
Ans: True
Dif: D
9. Under the Heckscher-Ohlin model, residents of a capital intensive
country will have a comparative advantage over a labor intensive country
because of the use of better technology in the capital intensive country.
Ans: False
Dif: M 10. A labor abundant nation will generally export capital intensive
goods.
Ans: False
Dif: M 11. Generally speaking, advanced economies would be expected to be net
exporters of capital intensive goods and services and net importers of
labor intensive goods and services.
Ans: True
Dif: M 12. Leontief's paradox refers to his findings that U.S. imports were
relatively more capital intensive than U.S. exports.
Ans: True
Dif: E 13. Adrian Wood's findings concerning exports of relatively skilled labor
intensive goods versus unskilled labor intensive goods support the basic
premise underlying the Heckscher-Ohlin model.
Ans: True
Dif: M 14. In factor proportion models uninterrupted trade leads to both
equalization of commodity prices and factor prices across all nations.
Ans: True
Dif: M 15. In factor proportion models uninterrupted trade will lead to
equalization of factor prices across all nations because otherwise capital
and labor will migrate to areas that pay higher rents and wages
respectively.
Ans: False
Dif: M 16. In factor proportion models the conclusion that uninterrupted trade
will lead to equalization of factor prices across all nations depends
critically upon the assumption that all countries have identical production
technologies and markets are perfect.
Ans: True
Dif: E 17. Owners of a nation's relatively scarce factor of production are
likely to be supporters of free trade.
Ans: False
Dif: E 18. In advanced economies we would expect owners of capital to be
supporters of free trade and workers will oppose free trade.
Ans: True
Dif: M 19. Outsourcing is a strategy where one organization hires another
organization to complete one part of the production process.
Ans: True
Dif: E 20. Revenue minus the cost of the intermediate good produced or purchased
is called the value added for that stage of production.
Ans: True
Dif: E 21. The propensity for comparative advantage to change suddenly from one
country to another is called evolutionary comparative advantage.
Ans: False
Dif: E 22. In the H-O model growth in a given factor favors the good or service
that uses that factor intensively in its production process.
Ans: True
Dif: E 23. In the H-O model a nation's trade pattern is determined solely by
relative factor endowments.
Ans: False
Dif: M 24. An increase in an endowment of the predominant factor in a country
increases international trade.
Ans: True
Dif: M 25. According to the Stolper-Samuelson theorem, if a nation has an
increase in the amount of a resource, it will produce more of the good that
uses the resource relatively intensively in its production process and
produce less of the other good.
Ans: False
Dif: M 26. The magnification principle indicates that the change in the price of
a factor will be less than the change in the price of the good that uses
the factor relatively intensively in its production process.
Ans: False
Dif: M Multiple Choice 1. Gondor has 500 units of labor resources and 900 units of capital.
Rohan has 300 units of labor endowments and 400 units of capital. Gondor
is relatively __________ and Rohan is relatively __________.
A) labor abundant; capital abundant
B) capital abundant; labor abundant
C) capital abundant; capital abundant
D) labor abundant; labor abundant
E) capital neutral; labor abundant
Ans: B
Dif: E 2. Gondor has 500 units of labor resources and 900 units of capital.
Rohan has 300 units of labor endowments and 400 units of capital. Food
requires 2 units of labor and 1 unit of capital to produce. Clothing
requires 3 units of capital and 2 units of labor to produce. Under free
trade Gondor will export __________ and Rohan will export __________.
A) food; capital
B) food; clothing
C) clothing; food
D) capital; labor
E) labor; capital
Ans: C
Dif: M 3. Furniture requires 2 units of labor and 4 units of capital to
produce. Electronics products require 7 units of capital and 3 units of
labor to produce. A __________ abundant country will have a comparative
advantage in the production of __________.
A) labor; electronics
B) capital; furniture
C) labor; furniture
D) landmass; electronics
E) capital; labor
Ans: C
Dif: M 4. Narnia has 300 units of labor resources and 500 units of capital.
Harad has 700 units of labor endowments and 400 units of capital. The
production of wheat requires 3 units of labor and 5 units of capital. The
production of equipment requires 4 units of labor and 9 units of capital.
Under autarky which country has the higher wage rate and in which country
is the price of equipment greater relative to wheat?
A) Harad; Narnia
B) Harad; Harad
C) Narnia; Harad
D) Narnia; Narnia
Ans: C
Dif: D 5. The term autarky means that
A) no international trade takes place between two countries.
B) two countries initially have the same factor proportions.
C) one country has an absolute advantage in capital and labor over the
other country.
D) free trade will increase the welfare of both countries.
E) free trade will not result in gains for either country.
Ans: A
Dif: E 6. Country E currently has a higher wage rate and a lower rental rate on
capital than Country F. Neither country trades with the other. If the
countries begin to trade with each other, it is likely that
A) wages will fall in Country E and rise in Country F.
B) rental rates on capital will rise in Country E and fall in Country F.
C) both wages and rental rates will fall in Country E and rise in
Country F.
D) both wages and rental rates will rise in Country E and rise in
Country F.
E) Both A and B will occur.
Ans: E
Dif: M 7. Country E currently has a higher wage rate and a lower rental rate on
capital than Country F. Neither country trades with the other. It is
likely that __________ will oppose allowing free trade.
A) workers in Country E and owners of capital in Country F
B) workers in Country F and owners of capital in Country E
C) workers in Country E and owners of capital in Country E
D) workers in Country F and owners of capital in Country F
E) workers in both countries
Ans: A
Dif: M 8. The basic factor proportions model assumes that labor and capital
A) can move freely between industries but not between countries.
B) can move freely between industries and between countries.
C) cannot move freely between industries or countries.
D) are endowed in equal proportions in both countries under
consideration.
E) are used in equal intensities in both goods produced.
Ans: A
Dif: E 9. The idea that a relatively labor abundant country will export labor
intensive goods and a capital abundant country will export capital
intensive goods is known as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) magnification principle.
Ans: B
Dif: E
10. The findings, based on input-output analysis that U.S. imports were
relatively more capital intensive than U.S. exports is referred to as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) magnification principle.
Ans: A
Dif: E 11. The idea that uninterrupted trade will result in equalization of
goods prices and factor prices across countries is the
A) Leontief paradox.
B) Rybczynski theorem.
C) Stolper-Samuelson theorem.
D) magnification principle.
E) none of the above
Ans: E
Dif: E 12. The conclusion that free trade raises the earnings of the nation's
relatively abundant factor is known as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) none of the above
Ans: D
Dif: E 13. The result that the change in the price of