In the long run Heckscher-Ohlin model with immigration, output increases in the industry that uses labor intensively and decreases in the other industry.
True
False
The correct answer and explanation is:
True
In the long run, the Heckscher-Ohlin model of international trade, which focuses on a country’s factor endowments (labor, capital, land, etc.), predicts that changes in the availability of factors of production can lead to shifts in output across industries. Immigration typically increases the supply of labor in the economy, which affects industries differently depending on their labor intensity.
In the Heckscher-Ohlin framework, an economy has two main industries: one that is labor-intensive and one that is capital-intensive. When immigration increases the supply of labor, it becomes cheaper and more abundant relative to capital. According to the model, this shift will have the following effects:
- Labor-Intensive Industry: The labor-intensive industry will benefit from the increase in labor supply. With more labor available, this industry can produce more at a lower cost. As a result, the output of the labor-intensive industry will increase in the long run.
- Capital-Intensive Industry: On the other hand, the capital-intensive industry may suffer from this increase in labor supply. As labor becomes relatively cheaper, capital becomes more expensive in comparison. This imbalance can lead to a reduction in production in the capital-intensive sector, as firms may not be able to afford the capital needed to complement the increased labor supply. Consequently, output in the capital-intensive industry will decrease.
This outcome aligns with the predictions of the Heckscher-Ohlin model, which suggests that an increase in the factor endowment of labor (due to immigration) will lead to an expansion of the labor-intensive industry and a contraction in the capital-intensive industry. Therefore, the statement is true.