labor abundant and which is relatively capital abundant
Utopia’s residents are endowed with
100 labor units and 75 capital units.
Idealand’s residents are endowed with 75
labor units and 50 ca
pital units. Which
nation is relatively labor abundant and
which is relatively capital abundant?
Suppose that at the current level of
production sandwiches require 1 labor unit
and 0.5 capital units to produce, while
bicycles require 0.9 labor units and 0.9
capital units. Based on this informati
on, which of the two goods is relatively
capital intensive in its production process,
and which is relativel
y labor intensive?
Draw PPFs for Utopia and Idealand.
Answer the following using your answer
s to questions a) and b). Suppose
Utopia’s and Idealand’s residents begi
n to trade. Which good will Utopia’s
residents export and which good will Utopi
a’s residents import?
Explain your
answer in the context of the
Heckscher-Ohlin theorem.
Based on your answer from part c), unde
r autarky will Utopia or Idealand have
the higher price of sandwiche
s relative to bicycles?
Under autarky, which nation has the higher wa
ge rate (w) relative to the rental
rate of capital (r). I.e. which count
ry has the higher w/r? Explain.
how the wage rate relative to the rent
al rate of capital (w/r) adjusts when
the residents of the two c
ountries begin to trade.
In Utopia, workers benefit or lose from
trade. How about the capital holders?
Use the appropriate theorem (i.e. state
that theorem’s name and what it says)
Question 2 (30 Points)
Assume that production exhibits increasi
ng opportunity costs. Australia is land
abundant and India is labor abundant. Wheat
is land intensive rela
tive to textiles.
a) Graphically demonstrate the pre-trade
and post-trade equilibrium in Australia.
Please put wheat in the x-axis.
It is not enough to draw
the diagram for full credit. Explain why you are have
different prices in the tw
o countries in autarky.
b) Graphically demons
trate the pre-trade and post-trade equi
librium in India. Find
and label its trade triangle.
Note: Please put wheat in the x-axis.
It is not enough to draw
the diagram for full credit. Explain why you are have
different prices in the tw
o countries in autarky.
c) Which factors gain and which factors lo
se when trade arises between these two
countries? Explain carefully.
Question 3 (15 Points)
Compare and contrast the classical and
H-O theories of trade. Discuss:
differences in assumptions
post-trade production points
Question 4 (15 Points)
Read the following article and then
answer the questions that follow:
Should the US expand trade with Africa?
In 2000, The US Congress passed the Africa
n Growth and Opportunity Act. This
legislation eliminated the
duties on nearly all goods produced by the nations of sub-
Saharan countries. The stated purpose of th
e law was to offer these nations access to the
global market for goods and services, th
ereby promoting economic growth and
Although the stated intentions of the act were
laudable, it faced considerable criticism.
Detractors contended that expanded trade with
Africa, where labor costs are much lower
than in the US, would disrupt US industries
and result in job losses. In addition, they
agreed that US businesses would use the opport
unity to exploit African workers and harm
the environment.
A year after the passage
of the act, Robert Zoellick, the
US trade representative, revisited
the issue. Zoellick argued that early evid
ence on the impact of expanded trade between
the nations is positive. African exports to th
e US remain a small percentage of overall
trade and therefore, have had
little impact on US importing
industries. US exports to
Africa-such as aircrafts, wheat, and autom
obiles, however, increased by more than 20
The early evidence also contradicts the arguments that US businesses would exploit
workers and the environment. Every sub-Saharan African nation endorsed the law,
noting that when US busine
sses locate in thei
r region, they pay higher wages and
promote better labor and environmental sta
ndards than do domestic firms.
Zoellick admits that trade alone will not solve all the region’s problems with growth and
development. Nonetheless, the African Gr
owth and Opportunity Act may well represent
a significant step toward improving economic
conditions. The Act may also complement
other programs and promote further action on ot
her important issues, such as debt relief
and combating AIDS and tuberculosis.
Source: Daniels and VanHoose, Global Econom
ic Issues and Principles (page 5)
What was the aim of the Act?
Why some Americans were against the Af
rican Growth and Opportunity Act?
What was the impact of the Act on:
i) US exports to Africa
ii) US imports from Afric





labor abundant and which is relatively capital abundant