Answer both questions! Germany has 1 million machines (Capital) and 1 million wo
ID: 1131711 • Letter: A
Question
Answer both questions!Germany has 1 million machines (Capital) and 1 million workers (Labor), while Japan has 2 million machines (capital) and 3 million workers (labor). If computers are produced mostly by capital and beer is produced mostly by labor, the H-O model predicts that?
- Japan will export computers in exchange for beer. - Germany will export computers in exchange for beer. - Germany is too small to be of economic interest to Japan Assume a two-country US and Japan, two-good, two-factor of production world where the following relationships hold (K/L)us (K/L)automobiles(K/L)shoes Where (K/L)us is the capital-labor ratio in the United States, (K/L)japan is the capital-
Explanation / Answer
The Heckster Ohlin model suggests that comparative advantage in trade is influenced by the proportion of resources available in the countries and the intensity of their use in the production of the goods to be traded. This means that if a country is relatively abundant in capital compared to another country, then it should export the capital intensive good and import the labour intensive good from it ( the other country is relatively abundant in labour).
In the current situation, the proportion of capital to labour in Germany is 1 ( 1million machines/ 1 million labouerers) while the proportion of capital to labour in Japan is 2/3 ( 2 million machines/ 3 million capital). Since Germany has more capital available per unit of labour, it is more abundant in capital compared to Japan. Here, production of computers is capital intensive and production of beer is labour intensive.Therefore, according to the Heckster Ohlin model, Germany will export computers in exchange for beer.
In the second part, it is given that capital labour ratio is higher for Japan and lower for the USA (K/L is greater for Japan). Also, it is given that automobiles are more capital intensive than shoes. Therefore, according to Heckster Ohlin model, Japan will export automobiles and USA will export shoes when there is free trade. So the opening up of trade will cause the production of automobiles to RISE and the production of shoes to FALL in Japan. This happens because some of the domestic requirement of shoes is now met by US import of shoes while the requirement of automibiles increases due to export to US increses.