Consider a Heckscher-Ohlin world with two countries (Japan and Ireland), two goods (Cameras and Linen), and...

Consider a Heckscher-Ohlin world with two countries (Japan and Ireland), two goods (Cameras and Linen), and two factors of production (labor(L) and capital(K)). Both factors of production are used in the production of each of these goods. Suppose the K/L ratio used to make linen is less than the K/L ratio used to make cameras. Also, the ratio of total capital to labor in the economy is higher in Japan than Ireland. Assume that Japan and Ireland have the same preferences and technology.

a.Which good is K-intensive? Which good is L-intensive?

b.Which country is K-abundant? Which country is L-abundant?

c.Draw the RD and RS diagram. Show each country’s RS curve. Which country should have a lower relative wage?

d.Without trade which country should have a higher relative price of linen?

e.With trade which country should export cameras and which country should export linen?

f.What should happen to the relative price of linen in each country with trade? What will this do to the relative wage in each country? Show in a diagram the relationship between the relative price of linen and the relative wage.

g.Suppose because of an EU development project, Ireland sees an increase in the amount of capital it has. What would this do to the relative quantity of linen produced in Ireland, the relative price of linen, and the allocation of capital and labor in Ireland.

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Expert Solution

Rahul Sunny answered 1 year ago

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