Study Guide, Chap. 3

International Economics

1. Define relative factor intensity of a commodity. Define relative factor abundance of a country. How are these two concepts used to explain the commodity composition of trade.











2. Demonstrate that under the factor proportions theory commodity movement and factor movement are substitutes for each other.











3. Distinguish between interindustry and intra-industry trade, providing examples of each.













4. Does the factor proportion theory provide a good explanation of intra-industry trade? If yes, then why? If no, what alternative explanation supports the growing phenomenon of intra-industry trade?

















5. If the U.S. has 100 million workers and $3,000 billion of capital, and Chile has 25 million workers and $500 billion of capital, what is the K/L (capital-to-labor) ratio in each country?







6. If country A is labor abundant and country B is capital abundant, factor proportions theory predicts that wages will _______ in country A, and the return to capital will _____ in country B.

1. A large home market can lead to a comparative advantage in goods produced under conditions of

______________________________

1. The exchange of automobiles between developed countries is an example of ________-industry trade.





2. Factor proportions theory is most successful in explaining trade between developed to developed, developing to developed, developing to developing, etc?



3. International trade tends to cause the price of the scarce factor to ______ and the price of the abundant factor to _____.





4. A factor intensive in the _____________________ stands to gain most from free trade in the long run.

1. A factor SPECIFIC____________________________________ stands to gain most from free trade in the short run.



2. The U.S. relative factor abundance is most pronounced in





3. The relatively scarce U.S. productive factor





4. The relatively abundant productive factor in Mexico is