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Author Question: Describe some of the problems in testing the Heckscher-Ohlin theory. What will be an ideal ... (Read 142 times)

altibaby

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on: Jun 30, 2018
Describe some of the problems in testing the Heckscher-Ohlin theory.
 
  What will be an ideal response?

Question 2

Explain why (holding interest rates constant), a rise in the expected depreciation in a country's currency leads to depreciation of that currency today.
 
  What will be an ideal response?


livaneabi

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Reply #1 on: Jun 30, 2018
Answer to Question 1

Leontief's test was incomplete because he did not have data on national factor endowments. He only looked at the relationship between factor intensities and trade flows. Recent tests by Maskus and Bowen, Leamer, and Sveikauskas incorporate factor endowments and still find evidence against the theory. However, their findings are based on assumptions about national technologies that may be incorrect. Moreover, data on factor endowments may not be very accurate.

Answer to Question 2

A rise in the expected depreciation rate of the dollar raises the expected dollar return on euro deposits. Now, there are excess supply of dollar deposits (euro deposits offer higher expected rate of return than do dollar deposits). The dollar must depreciate to remove this excess supply.


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