Assignment Chapter 4 Essay

Chapter 4:
1.
According to the table, which country is relatively more labor-abundant? Explain your answer. Which country is relatively capital abundant? United States Canada
Capital (machines) 40 10
Labor (workers) 200 60
The capital labor ratio of the US
(K / L) US is 40/200, = 1/5
Canada – (K / L) Canada is (10/60) = 1/6
(K / L) USA > (K / L) Canada
The United States is the relatively capital abundant country and Canada is the relatively labor abundant country.
Note that Canada’s absolute labor endowment is less than that of the USA but Canada it is still considered labor abundant because it has more labor relative to its capital.
Relative abundance of a factor implies that is autarky its relative cost is less than in countries where it is relatively scarcer. Conversely relatively scarce resources are more expensive. Consequently capital is relatively cheap in the USA and labor is relatively expensive.
2.
Suppose that the United States and Canada have the factor endowments in the table below. Suppose further that the production requirements for a unit of steel is two machines and eight workers, and the requirements for a unit of bread is one machine and eight workers United States Canada
Capital (machines) 40 10
Labor (workers) 200 60

(a)
Which good, bread or steel, is relatively capital intensive? Labor intensive? Explain how you know.
We take the unit factor requirements to produce steel and bread and we compare them to find out whether production of bread or steel is capital intensive. Therefore, compare the following ratios:

( 2 machines/ 8 workers) of steel > (1 machine / 8 workers) of bread
= (1/4) of steel > (1/8) of bread

Conclude from the above comparison that the production of steel is capital intensive and the production of bread is labor intensive

(b) Which country would export bread? Why?
Remember the H-O Theorem states that a country exports those goods that use intensively the factors in which the country is relatively abundantly supplied. To find out which country is abundant in capital, we take the total stock of capital and labor in both countries and compare these ratios. We compare the following

(40 machines / 200 workers) of USA > (10 machines / 60 workers) of Canada
= (1/5) USA > (1/6) Canada

Therefore, conclude that the United States is capital abundant and Canada is labor abundant. Then according to the H-O Theorem the United States would export steel and Canada would export bread.

5. Suppose that there are three factors: Capital, Labor, and Land. Bread requires inputs of land and labor, while steel requires capital and labor. a. Which factors are mobile and which are specific? b. Assume that Canada’s endowments of land and capital are 10 units of capital and
100 land, while the U.S.’s are 50 units of capital and 100 land. Which good does each country export? Why? c. How does trade affect the returns to land, labor, and capital in the U.S. and in Canada? (Be sure to provide the details on whose real incomes go up or down, which prices go up or down in which countries, and, if the effects are indeterminate, then explain why.)

a. Labor is the “mobile” factor because it is used in both sectors. Therefore, it is assumed to be perfectly

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