Consider a long-run Heckscher-Ohlin model with two goods (computer and shoe) and two factors of input (labour and capital). Both labour and capital can move between industries freely. Suppose that computers use 10 units of capital for each worker, so that KC=8LC𝐾𝐶=8𝐿𝐶, whereas shoes use 2 units of worker for each capital, so that 2KS=LS2𝐾𝑆=𝐿𝑆. There are 200 workers and 400 units of capital in the economy.a) Summarize the above information in an Edgeworth Box. (5 marks)
Question
Consider a long-run Heckscher-Ohlin model with two goods (computer and shoe) and two factors of input (labour and capital). Both labour and capital can move between industries freely. Suppose that computers use 10 units of capital for each worker, so that KC=8LC𝐾𝐶=8𝐿𝐶, whereas shoes use 2 units of worker for each capital, so that 2KS=LS2𝐾𝑆=𝐿𝑆. There are 200 workers and 400 units of capital in the economy.a) Summarize the above information in an Edgeworth Box. (5 marks)
Solution
To summarize the above information in an Edgeworth Box, follow these steps:
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Draw a box, with the origin of the box representing the total amount of resources in the economy. The width of the box represents the total amount of labour (200 workers), and the height of the box represents the total amount of capital (400 units).
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Draw a downward sloping line from the top left corner to the bottom right corner of the box. This line represents the production possibility frontier (PPF) for the economy, showing the maximum combinations of computers and shoes that can be produced given the available resources.
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Mark a point on the PPF line to represent the current allocation of resources. For example, if all resources are used to produce computers, the point will be at the top left corner of the box. If all resources are used to produce shoes, the point will be at the bottom right corner.
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Draw an indifference curve through the current allocation point. This curve represents the combinations of computers and shoes that the economy is indifferent between, given the current allocation of resources.
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Label the axes. The horizontal axis represents the quantity of computers produced, and the vertical axis represents the quantity of shoes produced.
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Indicate the capital-labor ratios for each good. For computers, the capital-labor ratio is 10:1, meaning that for each worker, 10 units of capital are used. For shoes, the capital-labor ratio is 1:2, meaning that for each unit of capital, 2 workers are used.
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Finally, label the box as "Edgeworth Box" and provide a brief explanation of what it represents.
Similar Questions
The Heckscher-Ohlin model assumes that there are two countries, each of which produces two goods(say manufactures and agriculture) using labor and capital. Which of the following is an additionalassumption of the Heckscher-Ohlin model?A. The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting indifferent “endowments” of capital and labor.B. One nation has larger quantities of both capital and labor than the other country.C. Capital is a specific resource in producing manufactured goods, and labor is a specific resource inproducing agricultural goods in each country.D. Labor and capital can move between countries
In the 2-factor, 2-good Heckscher-Ohlin model, an influx of workers from across the border wouldA) move the point of production along the production possibility curve.B) shift the production possibility curve outward, and increase the production of both goods.C) shift the production possibility curve outward and decrease the production of the labor-intensiveproduct.D) shift the production possibility curve outward and decrease the production of the capital-intensiveproduct.E) shift the possibility curve outward and displace preexisting labor.
1. The following are all assumptions that must be accepted in order to apply the Heckscher-Ohlin Theory, except for one:A. countries differ in their endowments of factors of production.B. countries differ in their technologies.C. there are two factors of production.D. one product always requires more machines per worker in its production than does the other product.
The Heckscher-Ohlin Theory is based on assumptions:a.Perfect competition exists in both the product and factor markets.b.The factors of production are fully employed in both nations.c.The factors' intensities are not reversible.d.All of these
2. The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that theformerA. has only two countries.B. has only two products.C. has two factors of production.D. has two production possibility frontiers (one for each country).E. None of the above.
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