Chapter 5: Q4. (page 223)
What is the source of Li & Fung’s success? Is it based on human capital, on ownership of a natural resource, or on ownership of capital?
The Li & Fung success is based on human capital
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Over the years, the WTO has increasingly found itself adjudicating trade disputes that involve not just tariffs or quota restrictions but also restrictions based on quality, health, and environmental considerations. Why do you think this has occurred? What method would you, as a WTO official, use to decide whether a quality, health, or environmental restriction is in violation of a free-trade agreement?
Explain the following patterns of trade using the Heckscher–Ohlin model.
a.France exports wine to the United States, and the United States exports movies to France.
b.Brazil exports shoes to the United States, and the United States exports shoe-making machinery to Brazil.
What principle do you think underlies Li & Fung’s decisions on how to allocate production of a good's inputs and its final assembly among various countries?
In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 tons of corn.
a.Determine the pattern of comparative advantage.
b.In autarky, the United States can produce 200,000 bicycles if no corn is produced, and China can produce 3,000 tons of corn if no bicycles are produced. Draw each country’s production possibility frontier assuming constant opportunity cost, with tons of corn on the vertical axis and bicycles on the horizontal axis.
c.With trade, each country specializes in its production. The United States consumes 1,000 tons of corn and 200,000 bicycles; China consumes 3,000 tons of corn and 100,000 bicycles. Indicate the production and consumption points on your diagrams, and use them to explain the gains from trade.
Why do you think a retailer prefers to have Li & Fung arrange international production of its jeans rather than purchase them directly from a jeans manufacturer in mainland China?
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