Question

it's the Heckscher–Ohlin Model, that's all the info I have. The answer can be general, thank you!

Use the shoe and computer example from the lecture notes, with shoe production using labor intensively and computer production using capital intensively. Examine the long-run impacts following a natural disaster that decreases the foreign country's population on

a) factor prices in the foreign country

b) production in the foreign country

what happens to the rentals on land and capital in the long run?

Answer 1

Here the labor intensive product is shoe and the capital intensive product is computer.

Due to a natural disaster, the population of a foreign country decreases. A reduction in the population of a country would indicate a reduction in the number of labors available for work. Thus the product which is labor intensive, that is shoe would not be produced on a massive scale as it was produced earlier. Labor becomes scarce. Thus the price of labor or wages would rise. Capital becomes abundant due to fall in demand of computers. (reduction in population) Thus price of capital falls.

(b) As the production in the shoe market is labor intensive, thus the fall in the population or number of workers available for the production process would tend to limit the production process in shoe industry. Also the production of computer will go down due to fall in demand by the people.

Land becomes abundant due to decrease in overall population. Thus rentals on land will be less comparatively and for capital too, there is abundance and thus price of capital will fall in the long run.