Question

Production of TVs are relatively capital intensive, and tennis racquets are relatively labor intensive. Suppose Canada has $20 billion of capital and 30 million workers and Mexico has $15 billion of capital and 10 million workers. According to the Heckscher-Ohlin(-Samuelson) model: Canada will import TVs and import tennis racquets. Canada will export TVs and import tennis racquets. Canada will import TVs and export tennis racquets. Canada will export TVs and export tennis racquets.

Answer 1

Ans: c) Canada will import TVs and export tennis racquets.

According to Hecksher-Ohlin theory, a nation will specialize in the production of that product which intensively uses the factor which is relatively abundant in that nation. Hence, it will export this good. And it will import that good which intensively uses that factor which is relatively less abundant in the nation.

Production of TVs: relatively capital intensive

Prodution of tennis racquets: relatively labor intensive

Lets look at capital abundance: (ratio of capital endowent to labor endowment)

Canada: (K/L) = $20 billion/30 million worker = $666 / worker

Mexico: (K/L) = $15 billion/10 million worker = $1500 / worker

Since, K/L is more in Mexico, Mexico is relatively more capital abundant. This means Canada is relatively labor abundant.

Now, according to Hecksher-Ohlin theory, Mexico being relatively capital abundant, will specialize in production of TV as they are relatively capital intensive. Similarly, Canada being relatively labor abundant, will specialize in production if tennis racquets as they are relatively labor intensive.

Therefore, Mexico will produce and export TVs to Canada. Canada will import these TVs. Canada will produce tennis racquets and export them to Mexico.