Question

Problem 2 Suppose when Japan opens to trade, i imports rice, a labor intensive good. n) According to the Heckscher -Ohlin theorem, is Japan capital abundant or labor abundat? Explain. Japan? capital? mobility across industries? Across countries? policies to limit free trade? Why? 2) What is the impact of opening trade on the real wage in 3) What is the impact of opening trade on the real rental rate on 4) What does the Heckscher Ohlin model assume about labor s) Which group (capital owners on workers) would support

Answer 1

1)

According to Hecksher Ohlin model, since Japan imports rice which is a labor intensive good, then it must be exporting capital intensive good. Thus Japan much be capital abundant.

2)

Since Japan is abundant in capital and relatively scarce in labor, thus a country has more propensity to produce capital intensive good and less of labor intensive good. As a result in autarky, labor intensive good will be priced bit high due to limited supply in Japan and less priced in labor abundant country. However, after the opening of trade, prices of both goods are equalized in the two markets due to factor price equalization theorem.

Thus after the opening of trade, price of labor intensive good decreases in Japan. So, by Stolper Samuelson theorem, the real wages would decline in Japan.

3)

Again following the similar line of reasoning as in part 2, capital intensive goods will be priced low in autarky and after the opening of trade, their price increases due to factor equalization theorem.

Thus by Stolper Samuelson theorem, the price of the factor used in making capital intensive good rises as well i.e. real rental rate on capital would increase in Japan.

4)

Hecksher Ohlin model assumes that both labor and capital are freely mobile across industries within the same country but they are immobile across countries.

5)

Since real wages for workers decline after the opening of trade, thus these group of workers would support policies to limit free trade. This is so because in autarky, price of labor intensive goods and the real wages remain high due to limited supply of labor. However these decreases after the opening up of trade.