True, False, Uncertain For Questions 1-6: Begin Your Answer

True False Uncertain For Questions 1 6 Begin Your Answer With The Qui

Suppose that imports and exports in an industry are both $100 million. If exports rise to $200 million, the value of the industry's index of intra-industry trade will fall.

False. The index of intra-industry trade (IIT) measures the degree to which a country both imports and exports similar products within the same industry. If both imports and exports are initially equal at $100 million, the initial IIT is moderate. When exports increase to $200 million, assuming imports remain at $100 million, the IIT would actually increase because the country now both exports more and continues to import, indicating a higher level of intra-industry trade, not a decrease. Therefore, the assertion that the index will fall is incorrect, as increased exports paired with sustained imports typically lead to a higher IIT, reflecting deeper integration within the industry rather than a decline.

Testing Paul Samuelson's model of a decrease in prices of exported production factors, we find that there has been significant deterioration in the U.S. position with respect to merchandise trade.

Uncertain. Samuelson’s model suggests that if the prices of the factors used in export production decrease, the competitive position of the country exporting those goods might weaken. In the context of the U.S., a significant decline in the prices of factors used in manufacturing, such as wages or capital costs, could lead to a relative deterioration of the U.S. position in merchandise trade. However, whether this deterioration is significant depends on the extent of the price decrease and the elasticity of demand. Additionally, other factors such as technological innovation and global supply chain shifts may influence trade positions. Hence, the assertion is uncertain without specific data on factor price changes and trade dynamics.

Starting in the early 1980s, the United States saw an increase in relative wages for skilled workers and an increase in the level of employment of skilled workers, which was difficult to explain with models of trade at the time, such as the H-O model.

True. The Heckscher-Ohlin (H-O) model predicts that country-specific factor endowments determine the pattern of trade, with the country abundant in certain factors specializing in goods that intensively use those factors. It suggests that skilled workers should have comparable wages across countries or that wage differences relate directly to relative endowments. The observed increase in relative wages and employment of skilled workers in the U.S. in the 1980s challenged the H-O model because these changes could not be fully explained solely through endowment differences. Instead, technological advancements, skill-biased technological change, and globalization contributed to rising wages of skilled workers, highlighting the limitations of the traditional H-O model in explaining such wage dynamics.

Vertical FDI refers to provision of a service or production of component parts of a good in different countries that are then used or assembled into a final good in another location.

True. Vertical Foreign Direct Investment (FDI) involves a firm establishing different stages of production in various countries based on comparative advantages such as lower labor costs or specialized resources. This form of FDI typically divides the value chain into different segments—such as manufacturing in developing countries and design or marketing in developed countries—and then combines these components in a final assembly or output stage elsewhere. This contrasts with horizontal FDI, which involves replicating the same production process across multiple countries.

In horizontal models of multinational activity, foreign direct investment flows between neighboring countries are particularly appealing.

True. Horizontal FDI refers to the replication of similar production activities across different countries, often motivated by the desire to serve local markets, reduce transportation costs, or avoid trade barriers. Neighboring countries are especially attractive due to geographical proximity, which facilitates market access, easier resource sharing, and lower transportation costs. Additionally, political and economic similarities between neighboring nations can ease the establishment and operation of multinational firms.

Paper For Above instruction

Foreign direct investment (FDI) is a vital component of globalization, influencing economic development, trade patterns, and industrial organization worldwide. Analyzing various aspects of FDI, including motivations, models, and implications, helps clarify how multinational corporations navigate international markets and strategic decision-making processes.

In considering the initial statement regarding the index of intra-industry trade, it is important to understand the nature of the measure itself. The intra-industry trade index captures the extent to which a country both imports and exports similar products within the same industry, reflecting specialization and product differentiation. Typically, an increase in exports alongside continued or increasing imports suggests a rise in intra-industry trade, thereby indicating deeper integration within the sector. Hence, if exports grow from $100 million to $200 million while imports remain at $100 million, the index would generally increase, contrary to the suggestion that it would fall. This scenario suggests that the industry experiences greater internal trade flows, often associated with product differentiation and economies of scale, core aspects of intra-industry trade dynamics.

Turning to Samuelson’s trade model and factor prices, the impact of a decrease in the prices of exported production factors can influence a country’s trade balance and comparative advantage. The U.S., as a major industrial economy, has historically benefited from stable or rising factor prices, especially wages for skilled workers. A significant decline could erode its competitive edge, leading to a deterioration in its trade position, especially if other countries experience stable or rising factor prices. Nonetheless, factors such as technological innovation, productivity gains, and trade policy measures also influence the trade balance. Generally, a decrease in export factor prices—if widespread—may diminish the profits from exporting sectors, making the economy less competitive internationally, hence the uncertain yet plausible assertion.

Furthermore, the evolution of the U.S. labor market in the 1980s presented a challenge to traditional trade theories like the Heckscher-Ohlin model. The observed rise in wages for skilled workers, coupled with increased employment levels, cannot be fully explained by simple factor endowment principles. Instead, technological change, particularly skill-biased technological change, played a central role. These innovations increased the productivity and relative demand for skilled labor, leading to wage polarization. Consequently, the traditional factor endowment approach is insufficient to account for the rapid wage divergence observed during this period, emphasizing the need for models incorporating technological and institutional factors to better understand wage dynamics.

Regarding FDI structures, vertical FDI involves establishing different stages of production in various countries based on comparative advantage. For example, a manufacturing firm might produce components in developing countries where labor costs are lower, and assemble these components into final products in high-income countries. This form of FDI allows firms to optimize production costs and access specific markets, with the division of labor across borders being driven by comparative advantage. Conversely, horizontal FDI involves replicating the same production activities across multiple countries, often to serve local markets or circumvent trade barriers. The choice between vertical and horizontal FDI depends on strategic considerations, market access, and factors such as transportation costs and local regulations.

In the context of multinational activity, proximity and similarity are critical factors that influence the attractiveness of cross-border investments. Horizontal FDI flows between neighboring countries are particularly appealing because geographical closeness reduces transportation costs, minimizes logistical complexities, and enhances the ease of management and coordination. Additionally, neighboring countries often share cultural, political, and economic traits, facilitating smoother integration and operation of multinational firms. These factors make cross-border investments between adjacent nations more viable and potentially more profitable, reinforcing the importance of location in the decision to undertake horizontal FDI.

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