Question

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

Answer 1

Answer:

According to the Heckscher –Ohlin theorem Japan is capital abundant country because when Japan opens to trade it imports labor intensive good; rice that means it not a labor abundant country so it is a capital abundant country and exports capital intensive good. As per Hecksher - Ohlin theory there is only two factors of production: labor and capital.

the Real wage in Japan will decrease after opening trade because now Japan is importing labor intensive good so the demand for labor will decrease and so does the wage rate of labor.

The real rental rate on capital will increase after opening trade because Japan will export capital intensive good so the demand for capital will increase and the increase in demand will lead to increase in the real rental rate on capital.

According to the Heckscher Ohlin model the labor is mobile across industries withing the country while labor is immobile across countries.

The labor group in Japan would support policies to limit free trade because due to free trade the demand for labor intensive good produced in Japan will decrease while the demand for imported labor intensive good; rice will increase as the imported good is less priced than the good produced in the country. the decrease in demand for labor intensive good will reduce the producer's surplus and wages of workers so they will support the limitation on free trade to reduce the imports