The following assumptions indicate the weaknesses of the Heckscher- Ohlin Theory:

• Two countries, two commodities and two factors of production
• Technology is the same in both countries.
• One of the commodities is labor-intensive and the other one is capital-intensive in both countries.
• One of the countries is labor-abundant and the other one is capital-abundant (not both of the countries are labor-abundant).

The correct answer is D.

Classical Trade Theory which is constructed upon both the Theory of Absolute Advantage and the Theory of Comparative Advantage postulates that the basis of the comparative advantage is the labor theory of value. The correct answer is " A " .

The assumption that ‘There is incomplete specialization in the production in both countries.’ postulates that both countries are continuing to produce both commodities. Countries trade with each other with respect to the comparative advantage under free trade. Each country specializes in the production of the commodity in which it has comparative advantage but does not end up to produce the other commodity in which it has a comparative disadvantage.

One of the commodities is labor-intensive and the other one is capital-intensive in both countries: This assumption acknowledges that there is no factor-intensity reversal. However, as we have already discussed in the previous chapter, factorintensity reversal is a factor that makes the Heckscher-Ohlin Theory invalid. Even though the studies show that the factor-intensity reversal rarely occurs, it is still an element that might impede the Heckscher-Ohlin Theory.

Elasticity of substitution of factors of production measures the ease with which one factor of production can be substituted for another within the production as the relative price of the factor declines. For example; suppose that the elasticity of substitution of labor for capital is much greater in the production of corn than in the production of wheel. Thus, it is much easier to substitute labor for capital in the production of corn than in the production of wheel.

Defining the key terms and concepts has to start with the term volume of trade. Volume of trade gives the total amount of imports and exports. Imports are the goods or services that are bought from a foreign country while exports refer to the goods or services that are sold to a foreign country. Therefore, the correct option is C.

Acquired Advantage; A country’s advantage in terms of products. The advantage gained in product technology is that a country produces unique products that can be easily distinguished from its competitors. Ex.; Danish silver-cutlery sets, Kütahya ceramics and porcelain.

Income inelastic demand: It refers to the situation when the increase in the demand for a certain commodity is smaller than the increase in income. Food and clothing are the main examples of income inelastic demand. Normal goods have income inelastic demand. The correct answer is " A ".

Positive economies of scale exist when the cost of producing a unit of commodity decreases as its output rate increases. Therefore, the correct option is A.

KEY TERMS AND CONCEPTS OF INTERNATIONAL TRADE-Income terms of trade

Apart from the commodity or net barter terms of trade which is examined above, there are income terms of trade that are mostly used in studies related with economic development. Income terms of trade gives the nation’s export-based capacity to import. In spite of a deterioration in the commodity terms of trade of the nation, an increase in its income terms of trade is a positive sign with respect to its economic development.

Acquired Advantage; A country’s advantage in terms of products. The advantage gained in product technology is that a country produces unique products that can be easily distinguished from its competitors. Ex.; Danish silver-cutlery sets, Kütahya ceramics and porcelain.

Indifference curve (I)
It represents the total demand of a country. The correct answer is " E ".

The following assumptions indicate the weaknesses of the Heckscher-Ohlin Theory:

• There is free trade between the trading countries.
• There is incomplete specialization in the production in both countries.
• There is constant returns to scale in the production of both commodities.
• There is perfect competition in the commodities and the factor markets in both countries.

The Heckscher-Ohlin Theory assumes that demand preferences are the same (not different) in both countries. The correct answer is B.

The decrease in the terms of trade often refers to a deterioration in the terms of trade. Therefore, the correct option is D. 

Information and transaction costs include collecting information about the demand preferences of the consumers, searching for new trade partners and regulations about new trading countries. It also includes the contracting cost. The correct answer is "D".

Existence of Government Policies: Government tax and subsidy programs alter the prices charged for goods and services. These changes can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries.

In the product-growth stage, production is performed only in the innovating country. Thus, the innovating country has a temporary monopoly power both in domestic and foreign market. This temporary monopoly power is enjoyed by the patent rights.

Inferior goods: It refers to the circumstance when the demand for a certain commodity decreases while the income increases. Potatoes and rice can be taken as examples for inferior goods. Inferior goods are the commodities that low-income consumers demand (Parkin, 2005, p. 90)

Foreign exchange rate: The price at which a currency is exchanged for the other currency refers to foreign exchange rate. Doğru yanıt " A " dır.

Income elasticity of demand: It is the degree of responsiveness of demand for a commodity or a service against a change in income, provided that all other things remain the same