Among the given statements pick one that best describes the diagram below (Heckscher-Ohlin model). Select one – the most appropriate answer.

Question

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The question asks which statement best describes the Heckscher-Ohlin diagram shown. I will evaluate each option in turn, then explain why the combination in option (e) is the best.

Option (b): 'Before trade relative price of cloth in Foreign is higher than in Home, thus Home is motivated to export cloth to Foreign and international trade begins.'
- In a Heckscher-Ohlin framework, if cloth is relatively cheaper in Home (i.e., the relative price PC/PF is lower in Home than in Foreign), Home tends to export cloth. If the relative price in Foreign is higher than in Home before trade, that means Home has the lower price for cloth, making Home an exporter of cloth. This aligns with standard HO logic: a country exports the good in which it has a comparative advantage (lower domestic price). Thus, statement (b) correctly captures the intuition that Home exports cloth when Foreign’s price is higher for cloth relative to Home.
- Misconception to avoid: It’s not about Foreign exporting cloth when its price is higher; rather, the country with the lower relative price exports that good. The phrase 'Foreign price higher than Home' implies Home exports cloth, which matches (b).

Option (c): 'Before trade relative price of cloth is higher in the world market compared to its level in Home, thus Home is interested in exporting cloth seeking higher profits.'
- This describes a world price (Pworld for cloth) that exceeds Home’s pre-trade price for cloth. If the world price is higher than Home’s autarky price, Home can profit by exporting cloth since it can sell at the higher world price while initially producing at Home’s lower cost. This is also consistent with the HO framework: a rise in the world price of a cloth relative to Home’s autarky price induces Home to export cloth to capture the higher profits.
- Potential confusion: It’s not required that Foreign’s price be compared; the key is the world price exceeding Home’s internal price, which creates an incentive to export. So (c) correctly describes the standard open-economy implication.

Option (a): 'Before trade relative price of cloth in Foreign is lower than in Home, thus Foreign is motivated to export cloth to Home and international trade begins.'
- If Foreign’s relative cloth price is lower than Home’s, Foreign has the comparative advantage in cloth, not Home. The statement says Foreign exports cloth, which is inconsistent with the usual HO logic when Foreign has the lower price for cloth; instead, Foreign would export the good in which it has the lower domestic price, meaning the country with the lower relative price exports that good. Therefore (a) is incorrect in identifying the exporting country.

Option (d): 'Before trade relative price of food in Home is higher than in Foreign, thus Foreign is interested to export food to Home and international trade begins' 
- The diagram concerns cloth with relative price PC/PF and the HO model’s core idea about factor endowments and relative commodity prices. This option talks about food (not the focus of the pictured cloth–food composite) and asserts Foreign would export food because Home has a higher relative price for food. That contradicts the standard interpretation: a country exports the good for which its relative price is lower. Since the statement references food, which is outside the diagram’s main variable (cloth), it misapplies the model to a different good, making it incorrect as a description of the depicted situation.

Option (f): 'Answers (a) and (d) are correct.'
- Since both (a) and (d) are incorrect for reasons above, this composite claim is false. It incorrectly asserts those misinterpretations hold simultaneously.

Option (g): 'Answers (b) and (d) are correct.'
- This combines (b), which is arguably consistent with HO reasoning, with (d), which we argued is inconsistent or misapplied to the diagram. Therefore, (g) is not the best overall description of the diagram.

Option (e): 'Answers (b) and (c) are correct.'
- This option asserts that both (b) and (c) accurately describe the HO diagram’s implications before trade for cloth. As analyzed, (b) correctly states that if Foreign’s cloth price is higher than Home’s, Home exports cloth. (c) correctly states that if the world price of cloth is higher than Home’s autarky price, Home exports cloth to gain profits. Since both of these statements align with the diagram’s logic about pre-trade price relationships and trade incentives, (e) is a coherent combination of two consistent interpretations. The other choices either misidentify which country exports a good or misapply the model to a different good, making them less accurate.

econ_420_120255_249094 Lesson 5 Quiz 2

Among the given statements pick one that best describes the diagram below (Heckscher-Ohlin model). Select one – the most appropriate answer.

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