University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-

Institute), International Trade and Food Security (490b)

International Food and Agricultural Trade (4902 – 420)

Summer Semester 2025

Solutions to Catalogue of Questions:

4. Resources and Trade: The Heckscher – Ohlin Model

Ex. 17.

Define the following key terms:

a) The resource of which a country has a relatively large supply is considered the
abundant factor in that country. Conversely, the resource of which the same country
has a relatively small supply is labelled as the scarce factor.
b) The Rybcznski theorem supposes if the amount of one factor of production increases
and output prices are held constant, then the supply of the good that uses this
augmented factor intensively increases and the supply of the other good decreases.
c) The Stolper-Samuelson theorem supposes if the relative price of a good increases then
the real wage or real lending/ renting rate of the factor used intensively in the
production of that good increases, while the real wage or real lending/renting rate of
the other factor decreases.
Discuss the distinctions between the Ricardian and H-O model with respect to:

a) Number of factors of production.

In the Ricaridian model, the only resource that is important for production is land. In
the H-O model, both land and labor services are important for production.

b) Technologies within countries.

In the Ricardian model, production technology is assumed to differ across countries
causing variations in the labor productivity. In the H-O model, notwithstanding the fact
that the production processes use factors of production with relative intensity, countries
utilize the same technology.

c) Potential for production specialization.

1
 University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

In the Ricardian model, a country with a comparative advantage in producing a good

uses its resources most efficiently when it produces that good compared to producing
other goods.

In the H-O model, an economy is relatively efficient at producing goods that are
intensive in its abundant factors of production and will export these goods.

d) Gains from trade

In the Ricardian model, gains from trade stem from a country specializing in the
production in which it uses resources most efficiently (comparative advantage) and
using the income generated from that production to buy the goods and services desired
in that country. The welfare effect of trade is that individuals in both trading countries
benefit. At the very worst, some individuals will be just as well off as in autarky. This
result occurs for any free trade price ratio that lies between the autarky price ratios.

In the H-O model, while there are overall gains from trade, but there are individual
winners and losers. Specifically, it predicts that owners of abundant factors will gain
and owners of scare factors will lose from trade.

Ex. 18.

Suppose that at current factor prices cloth is produced using 20 hours of labor for each acre of
land and that food is produced using only 5 hours of labor per acre land.

a) Suppose that the economy's total resources are 1200 hours of labor and 120 acres of
land. Use a diagram to determine the allocation of resources.
The box diagram has 1200 as the length of two sides (representing labor) and 120 as
the length of the other two sides (representing land). There will be a ray from each of
the two corners representing the origins. To find the slopes of these rays we use
the information from the question concerning the ratios of the production coefficients.

The question states that aLC /aTC = 20 and aLF /aTF = 5.

Since aLC =(LC /QC) and aTC = (TC /QC), then aLC /aTC = (LC /QC)/(TC /QC) = LC /TC =20,
then we have LC = 20TC.

2
 University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

Using the same reasoning, aLF /aTF = (LF /QF)/(TF /QF) = LF /TF =5, then we have LF =
5TF.

Solving this algebraically since L = LC + LF = 1200 and T = TC + TF = 120.

The solution is LC = 800, TC = 40, LF = 400 and TF = 80.

b) Now suppose that the labor supply increases first to 1,600 then 2,000, then 2,400
hours. Use a diagram to trace out the changing allocation of resources, assuming
prices remain constant.

The dimensions of the box change with each increase in available labor, but the slopes
of the rays from the origins remain the same. The solutions in the different cases are as
follows:

L = 1600: TC = 66.66, LC = 1,333.34, TF = 53.34, LF = 266.66

L = 2000: TC = 93.34, LC = 1,866.66, TF = 26.66, LF = 133.34
L = 2400: TC = 120, LC = 2400, TF = 0, LF = 0
(complete specialization).

The new box diagram for the L=1600 is given below.

3
 University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

An increase in labor supply makes the box representing the economy’s resources
longer; resources allocated to cloth production now is measured from OC *. Because
goods prices remain constant, and thus factor prices and land-labor ratios remain the
same, resource allocation moves from 1 to 2 with more land and labor devoted to cloth
production. The output of food falls, output of clothes increases.

c) What would happen if labor supply were to increase even further?

At constant factor prices, some labor would be unused, so factor prices would have to
change or there would be unemployment.

Ex. 19.

This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Consider the
production of hand-made rugs and assembly line robots in Canada and India.

a) Which country would you expect to be relatively labor-abundant, and which

capital-abundant? Why?
Given Canada’s relatively small population (30 million compared with more than 1
billion in India) and level of development, it is a safe assumption that:

𝐿𝐿𝐼𝐼𝐼𝐼𝐼𝐼 𝐿𝐿𝐶𝐶𝐶𝐶𝑛𝑛
>
𝐾𝐾𝐼𝐼𝐼𝐼𝐼𝐼 𝐾𝐾𝐶𝐶𝐶𝐶𝐶𝐶

That is, there is more capital per worker in Canada, making it capital-abundant
compared with India. Similarly, India would be labor-abundant.

4
 University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

b) Which industry would you expect to be relatively labor-intensive, and which is

capital intensive? Why?
Given the amount of capital required to produce robots and the amount of labor
required to produce rugs, one would expect that:

𝐿𝐿𝑟𝑟𝑟𝑟𝑟𝑟 𝐿𝐿𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
>
𝐾𝐾𝑟𝑟𝑟𝑟𝑟𝑟 𝐾𝐾𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

making robots capital intensive and rugs labor intensive.

c) Given your answers to (a) and (b), draw production possibility frontiers for each
country. Assuming that consumer preferences are the same in both countries, add
indifference curves and relative price lines (without trade) to your PPF graphs.
What do the slopes of price lines tell you about the direction of trade?

The slope of the price line (budget constraint) shows us the relative price of robots.
Accordingly, Canada’s no-trade production and consumption of robots and rugs
corresponds to a relative price of robots that is lower than that in India. This is
shown by the flatter sloped relative price line in Canada.

• Point A in the graph shows the “no trade” equilibrium;

• Consumer preferences are summarized by indifference curves. Since
consumer preferences and tastes are given identical, the shape of
indifference curves are the same in both countries;
• Indifference curves and price lines are tangent to PPF;
• Canada’s PPF is skewed towards robots;

5
University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

• India’s PPF is skewed towards rugs;

• A steepy slopped price line implies higher relative prices of robots;
• A flatter price line implies lower relative prices of robots.
d) Allowing for trade between countries, redraw the graphs and include a “trade
triangle” for each country. Identify and label the vertical and horizontal sides of the
triangles as either imports or exports. What happens to the wage relative to rental on
capital in each country?

Canada: Under free trade, the relative price of robots lies between the no-trade
relative prices of each country. Since Canada has lower relative price of robots, free
trade equilibrium price will be above the no-trade price. The price increase in
Canada is denoted by a steeper production possibility frontier. Accordingly, after
trade Canada produces more robots and fewer rugs to take advantage of the higher
prices. As Canada is now engaged in trade, this allows consumers to consume
anything on the price line. This effect is also shown by a movement of the indifference
curve; highest utility is obtained by the indifference curve that is tangent to world
price line.

India: Under free trade, the relative price of robots lies between the no-trade relative
prices of each country. Since India has higher relative price of robots, free trade
equilibrium price will be below the no-trade price. The price decrease in India is
denoted by a flatter production possibility frontier. As India is now engaged in trade,
this allows consumers to consume anything on the price line. This effect is also shown
by a movement of the indifference curve; highest utility is obtained by the indifference
curve that is tangent to world price line.

6
 University of Hohenheim, Institute for Agricultural Sciences in the Tropics (Hans-Ruthenberg-
Institute), International Trade and Food Security (490b)

The “trade triangle” has a base equal to Indian imports of robots (difference between
the consumption of robots and the amount produced with trade). The height of this
triangle is Indian exports of rugs (the difference between the production of rugs and
amount consumed with trade). Vice versa for Canada.

In Canada, where the relative prices of robot increase, the wage relative to the rental
of capital decrease. Whereas in India, the wage relative to the rental of capital
increases due to the increased price of rugs relative to robot.

Ex.20.

Leontief's paradox is an example of testing a trade model using actual data observations. If
Leontief had observed that the amount of labor needed per $ 1 million of U.S. exports was 100
instead of 182, would he have reached the same conclusion?

Leontief's test:

Leontief used the numbers in the table to test the Heckscher-Ohlin theorem. Each column shows
the amount of capital or labor needed to produce $ 1 million worth of exports from, or imports
into, the U.S. in 1947. As shown in the last row, the capital labor ratio for exports was less than
the capital-labor ratio for imports, which is a paradoxical finding.

Exports Imports
Capital ($ millions) 2.55 3.1
Labor (person-years) 182 170
Capital / labor ($/person) 14,000 18,200

If the amount of labor required for $ 1 million of U.S. exports was 100 person-years instead of
182, then the capital/labor ration for exports would have been $ 25,500 per person. Because
this is larger than the corresponding ratio for imports, this test would have provided support
for the Heckscher-Ohlin theorem. That is, the U.S. (which was assumed to be capital-abundant
in both cases) would have been shown to export capital-intensive good. In actuality, however,
Leontief's test showed exactly the opposite.