Consider the Heckscher-Ohlin model with two countries, Home and Foreign, and two goods, carpets and tableware....

Consider the Heckscher-Ohlin model with two countries, Home and Foreign, and two goods, carpets and tableware. There are two factors, capital and labour, each of which can be used in the production of either good. Home is capital abundant whereas Foreign is labour abundant. Let PC and PT represent the prices of carpets and tableware, respectively. Assume that under autarky we have (PC/PT) Home < (PC/PT) Foreign. Moreover, assume that there is some degree of substitutability in production between capital and labour.

(a) Given the information above, which good is capital intensive and which good is labour intensive?

(b) Consider free trade between Home and Foreign. What is the trade pattern, i.e., which country exports and imports which good?

(d) As a result of trade, explain what happens to wage/rental ratio in each country as well as labour/capital ratio in each industry in each country?

(e) Who will support and who will oppose to free trade in each country?

(f) Now suppose that some of the workers from Home country migrate to Foreign country. (Assume that both goods continue to be produced after migration and goods prices are constant, i.e., does not change). Which factors benefit and which factors lose in each country? What happens to the production of each good in each country?

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Rahul Sunny answered 1 month ago

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