Question

6. Suppose when Japan opens to trade, it imports rice, a labor-intensive good. a. According to the Heckscher-Ohlin theorem, is Japan capital-abundant or labor-abundant? Briefly explain.

Answer 1

a) As Japan is importing a labor-intensive good hence it must export a capital intensive good. So Japan is capital-abundant.

b) According to the Stolper-Samuelson theorem, price of the factor that is relatively abundant in a country would rise if the price of that particular good also rises and the price of the relatively scarce factor would fall. As Japan is a capital-abundant country, hence by exporting its goods at a higher price it is increasing the factor price of capital also. Hence, the real wage rate,i.e, the relatively scarce factor's price would decrease.

c) The real rental would increase in Japan as it is a capital-abundant country. According to the Stolper-Samuelson theorem, price of the factor that is relatively abundant in a country would rise if the price of that particular good also rises and the price of the relatively scarce factor would fall. As Japan is a capital-abundant country, hence by exporting its goods at a higher price it is increasing the factor price of capital also.

d) As trade progresses the country would increase the production of its exporting good and reduce the production of its importing good. Hence, the domestic supply of rice would decrease and the laborers would be out of jobs and their wage rate would also decrease. So, the labor would want to support policies to limit free trade so that they can reduce competition.