Question

1a Supposing that 3K and 12L are required to produce 1X, while to produce 1Y requires 2K and 2L, X is K-intensive commodity or L-intensive commodity related to Y, how about Y?

1b Assuming that nation1 has 100 million workers and $4000 billion of capital, whereas nation2 has 30 million workers and $600 billion of capital, which nation is capital abundant, which is labor abundant?

1c With the results of Q5 and Q6, if it is possible for the two nations to trade with each other according to the H-O theorem? What is the basis for trade? What is the pattern of production and trade? Draw a figure to show the gains from trade, supposing the two nations have similar tastes.

Q5 Q6 is equal to 1a and 1b

Answer 1

1a

X (3L, 12K) - K intensive commodity as compared to Y (As K/L ratio is 4 as compared to 1)

Y (2L, 2K) - L intensive commodity as compared to X (As L/K ratio is 1 as compared to 1/4)

1b

nation1 (100m L , 4000b K) - (K/L ratio is 40) - Capital abundant

nation2 (30m L, 600b K) - (K/L ratio is 20) - Labor abundant

1c

Yes

Basis of trade

- labor abundant country should focus on labor intensive product

- capital abundant country should focus on capital intensive product

So,

nation1 should focus on product X

nation2 should focus on product Y

nation1 (100m L , 4000b K)

X (3L, 12K)

Number of X that can be produced = min (100m/3 , 4000b/12) = 100m/3 = 33.33m (if only X is produced)

nation1 (100m L , 4000b K)

Y (2L, 2K)

Number of X that can be produced = min (100m/2 , 4000b/2) = 100m/2 = 50m (if only Y is produced)

nation2 (30m L, 600b K)

X (3L, 12K)

Number of X that can be produced = min (30m/3 , 600b/12) = 30m/3 = 10m (if only X is produced)

nation2 (30m L, 600b K)

Y (2L, 2K)

Number of Y that can be produed = min (30m/2,600b/2) = 15m (if only Y is produced)

Below graph is assuming that

nation1 focusing on product X

nation2 focusing on product Y