Question

Shoes are labor-intensive and satellites are capitalintensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher-Ohlin model, which good will China export? Which good will the United States export? In the United States, what will happen to the price of labor (the wage) and to the price of capital?

Short answer

Answer: Based on the Heckscher-Ohlin model, China will export shoes (labor-intensive goods), and the United States will export satellites (capital-intensive goods). In the United States, the price of labor (wages) will decrease, and the price of capital will increase.

Step-by-step solution

Understand Given Information

According to the given information, shoes are labor-intensive to produce, and satellites are capital-intensive to produce. The United States has abundant capital, and China has abundant labor.

Identify Exports for Each Country

Based on the Heckscher-Ohlin model, China will export the good that uses its abundant factor intensively, which is labor. In this case, since shoes are labor-intensive, China will export shoes. The United States will export the good that uses its abundant factor intensively, which is capital. In this case, since satellites are capital-intensive, the United States will export satellites.

Determine the Effect on the Price of Labor and Capital in the United States

Exporting capital-intensive goods, like satellites, would lead to an increase in the demand for capital within the United States. This would cause the price of capital to rise. On the other hand, with the United States exporting capital-intensive goods and importing labor-intensive goods, such as shoes, the demand for labor in the United States would decrease. This would lead to a decrease in the price of labor (wages) in the country. In conclusion, based on the Heckscher-Ohlin model: 1. China will export shoes (labor-intensive goods) 2. The United States will export satellites (capital-intensive goods) 3. In the United States, the price of labor (wages) will decrease, and the price of capital will increase.

Key concepts

Understanding Labor-Intensive Goods

Labor-intensive goods are products that require a significant amount of human labor to produce. In industries where these goods are prominent, workers are essential components of the production process. Examples of labor-intensive goods include textiles, agricultural products, and, as mentioned in the exercise, shoes. These products typically require extensive hands-on effort, which is more prevalent in countries with abundant labor.

In the context of the Heckscher-Ohlin model, a country like China, which is abundant in labor, will specialize in and export goods like shoes. This model suggests that countries will export products that intensively use the resources they have in abundance. Thus, labor-abundant countries benefit from lower production costs due to available labor and consequently have a comparative advantage in labor-intensive goods like shoes. This comparative advantage is a crucial element of international trade and helps in determining which goods a country will export or import.

Exploring Capital-Intensive Goods

Capital-intensive goods are those products that require a lot of capital, such as machinery, technology, and infrastructure, in their production processes. These goods often involve advanced manufacturing techniques and significant investments in equipment and facilities. Examples include automobiles, electronics, and satellites. Due to the reliance on high levels of capital, only countries with abundant capital resources can produce these goods efficiently.

In relation to the United States, which has an abundance of capital resources like machinery and financial means, the Heckscher-Ohlin model predicts that the country will specialize in and export capital-intensive goods. Hence, the production and exportation of satellites by the United States make economic sense, as they use capital abundantly and efficiently. This specialization benefits capital-abundant countries as it maximizes the utilization of their capital resources, potentially leading to increased investment, innovation, and economic growth. By focusing on capital-intensive goods, these countries can maintain a competitive edge in global markets.

Role of International Trade in the Heckscher-Ohlin Model

The Heckscher-Ohlin model is a fundamental economic theory that helps explain patterns of international trade based on resource endowments of different countries. It asserts that countries will export products that utilize their abundant factors of production and import those that use their scarce factors. This is how nations capitalize on their comparative advantage, leading to a more efficient global allocation of resources.

International trade enables countries to gain access to a broader range of goods and services beyond their domestic capabilities. By exporting labor-intensive goods like shoes, China benefits from utilizing its abundant workforce. Conversely, by exporting capital-intensive goods like satellites, the United States can leverage its abundant capital resources. This trading system helps improve worldwide economic efficiency and promotes technological and industrial advancements.

Moreover, the effects on domestic prices of labor and capital are also significant. As countries specialize based on their resource endowments, the dynamics of supply and demand for these resources shift. For instance, in the United States, exporting capital-intensive goods can increase the price of capital due to heightened demand, while wages may decline as demand for domestic labor decreases. This interplay is a pivotal part of how international trade shapes economies globally.