Assume that Trinbago is a small country that produces wine and motor vehicles, where motor vehicles are capital intensive. Trinbago is also capital intensive, and the standard Heckscher -Ohlin (H-O) assumptions hold. The other country in the model is Vincyland. Questions: Give a short background on the Heckscher-Ohlin Trade model and then answer the following questions. (a) Based on the H-O assumptions, which good should Vincyland export, and why? (b) What trade pattern would occur if the Leontief Paradox holds? Which two (2) explanations of the Leontief Paradox most strongly support the H-O theory? Give the reasons. (c) In autarky, according to Ohlin, how does Trinbago’s relative price of labor compare to Vincyland’s?
Assume that Trinbago is a small country that produces wine and motor vehicles, where motor
vehicles are capital intensive. Trinbago is also capital intensive, and the standard Heckscher -Ohlin
(H-O) assumptions hold. The other country in the model is Vincyland.
Questions:
Give a short background on the Heckscher-Ohlin Trade model and then answer the following
questions.
(a) Based on the H-O assumptions, which good should Vincyland export, and why?
(b) What trade pattern would occur if the Leontief Paradox holds? Which two (2)
explanations of the Leontief Paradox most strongly support the H-O theory? Give the
reasons.
(c) In autarky, according to Ohlin, how does Trinbago’s relative price of labor compare to
Vincyland’s?
(d) Show the necessary graphs to explain all requested effects fully. Ensure to label graphs and
give brief explanations.
(e) Given that Vincyland is a small country, examine the partial equilibrium welfare effects
associated with imposing a tariff on their import good given that the prediction of the
imported good yields a positive externality. Should a subsidy have given a more
desirable solution. Please explain.
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