Part IV. Heckscher-Ohlin Model Consider two countries, Vietnam and China, produc
ID: 1141365 • Letter: P
Question
Part IV. Heckscher-Ohlin Model Consider two countries, Vietnam and China, producing two goods, textile and televisions Suppose that textile is relatively labor-intensive. Vietnam has 20 units of capital and 16 units of labor and China has 300 units of capital and 150 units of labor. 1. Which country is relatively capital-abundant? Explain. 2. Which country will export textile? Explain. 3. In Vietnam the production of which good decreases under trade? In China? 4. In China, is the relative price of televisions higher under free trade or no trade? Explain. 5. Which group benefits from trade in China? In Vietnam?Explanation / Answer
Answer:
Hecksher- Ohlin model of international trade says that the trade between two countries will take place according to their factor endowments means that a country will export the commodity which it can produce with its abundant factors and will import commodity whose factors are scarce in the country.
Vietnam has capital (Kv) = 20 units
Vietnam has labour (Lv) = 16 units
China has capital (Kc) = 300 units
China has labour (Lc) = 150 units
Answer: 1. To calculate the factor intensity between these two countries we will take their labour –capital ratio. The higher the ratio the more the capital abundant the country will
Factor intensiveness = Kv/Lc = Kc/Lc
20/16 = 300/150
1.25 = 2
1.25 < 2
So the ratio is high for china that means China is relatively capital –abundant country
Answer: 2: Vietnam will export textile because textile is relatively labour –intensive good and Vietnam being a labour abundant country will produce textile and export it.
Answer: 3: in Vietnam the production of television will decrease as Vietnam will produce more textiles while in china the production of textile will decrease as it will produce more televisions.
Answer: 4: in china the relative price of television will higher under free trade as after entering into trade the demand for television will increase.
Answer: 5: the customer of textiles will be benefitted from trade as they will import textile at low prices while the customer of television will be benefitted in Vietnam.