Assume the Heckscher-Ohlin model where there are two goods, autos and cloth.

Assume the Heckscher-Ohlin model where there are two goods, autos and cloth. The home country is capital abundant while the foreign country is labor abundant. Autos are capital intensive while cloth is labor intensive. What effect does trade have on aggregate demand and supply of labor in the home country?

a. The aggregate labor demand curve shifts left while the labor supply curve is unchanged

b. Both the aggregate labor demand and labor supply curves shift left

c. The aggregate labor demand curve shifts right while the labor supply curve is unchanged

d. Both the aggregate labor demand and laborsupply curves shift right

Solutions

Expert Solution

Ans. The aggregate labor demand curve shifts left while the labour supply curve is unchanged. According to H-O international trade theory a country with higher abundant of captial will export higher captial intensive goods and vice-versa. Being the home country capitally abundant it seeks to produce and export more capital expensive goods and import labor intensive goods, therefore their demand for labor will decrease when labor amount is unchanged.

Rahul Sunny answered 1 year ago

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