International Trade - Theory and Policy, 2010a

this requires a fair amount of advanced math, but a student can rest assured that we can apply the
magnification effect even in the more complex variable proportions version of the Heckscher-Ohlin (H-O)
model.
KEY TAKEAWAYS
Variable proportions imply that the capital-labor ratios used in production are varied as wage and rental
rates change in the economy.
Variable proportions imply that the PPF becomes bowed out and continuous, consisting of many output
combinations that can be produced with full employment of labor and capital.
Variable proportions do not invalidate the Rybczynski theorem, the Stolper-Samuelson theorem, or the
magnification effects for quantities and prices.
EXERCISE
1. Jeopardy Questions. As in the popular television game show, you are given an answer to a
question and you must respond with the question. For example, if the answer is “a tax on
imports,” then the correct question is “What is a tariff?”
1. Interpretation given for the slope of the production possibility frontier in the case of
variable proportions in the Heckscher-Ohlin model.
2. In a variable proportion H-O model, the factor proportions in each industry vary with changes
in these two other variables.
3. Of increase, decrease, or stay the same, this is the effect on the capital-labor ratio in an
industry when wages fall in a variable proportions H-O model.
4. Of increase, decrease, or stay the same, this is the effect on the amount of capital used per
worker in an industry when rental rates increase in a variable proportions H-O model.
5. Of increase, decrease, or stay the same, this is the effect on the labor-capital ratio in an
industry when wages fall in a variable proportions H-O model.
6. Of increase, decrease, or stay the same, this is the effect on the capital-labor ratio in the
cheese industry when wages increase in a variable proportions H-O model, if cheese is a
labor-intensive industry.
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