One of the commonly used assumptions in deriving the ...

[melly21297]

One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that tastes are homothetic, or that if the per capita incomes were the same in two countries, the proportions of their expenditures allocated to each product would be the
 
  same as it is in the other country. Imagine that this assumption is false, and that in fact, the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage. How would this affect the relationship between relative factor abundance between the two countries, and the nature (factor-intensity) of the product each exports? What if the taste bias favored the imported good?

Question 2

In the short-run, an increase in government purchases will cause
 
  A) a shift of the DD curve to the left and an increase in output.
  B) a shift of the DD curve to the right and a decrease in output.
  C) a shift of the DD curve to the left and a decrease in output.
  D) a shift of the DD curve to the right and an increase in output.
  E) a shift of the DD curve the left and an appreciation of the currency.

[Laurenleakan]

Answer to Question 1

If in fact national tastes were strongly biased in favor of the product in which the country enjoyed a comparative advantage, then we would expect a bias in favor of rejecting the Heckscher-Ohlin Theorem in actual trade data. The engine driving the H-O model is that a country should be expected to have a relatively low cost of producing the good in which it has a comparative advantage. However, the respective demand forces would tend to raise the price of this good, so that the expected pattern would not generally be observed. However, if the tastes were biased in favor of the imported good, then the predictions of the Heckscher-Ohlin Theorem would be expected to be generally observed.

Answer to Question 2

D