Question

Consider Home produces computers(C) and food(F) using capital(C) and labor(L). The unit factor requirements are fixed and given by: a_LC = 2, a_KC = 6, a_LF = 3, a_KF = 4. The total labor supply is 900 and the total capital stock is 1,500. Foreign, with a labor supply of 1,200 and a capital stock of 1,800. Foreign shares the same technology with Home (i.e., aL_C=2, aK_C= 6, a^∗_LF = 3, a^∗_KF = 4). Home and Foreign engage in free trade. Suppose the world relative price of computers is given by P_C/P_F = 1.2.

a. Which country is relatively capital abundant and which labor abundant?

b. Describe the pattern of trade between Home and Foreign.

c. Show graphically the production and consumption of Home under free trade.

d. Who will gain and who will lose from free trade?

e. In which country are wages higher?

Answer 1

foreign country is relatively more abundant in labor and capital . even though they are using the same units of factor as home foreign has the great advantage on production.

the pattern of free trade between home and foreign will be such that they don't have to face any competition and also the foreign will be able to help home during the trade. they even can send the home technology and also ideas on how to increase the production. the free trade will help both foreign and home in producing and selling goods without any kind of competition . The main aim of free trade is to reduce the competition and to export goods or service without any traffic or tax.

Under free trade home will have the great strength such that home will gain so much from free trade with foreign . And the foreign will have to face some difficulties .

Wages are higher in foreign. as they have a abundant labor and capital supply which will lead to increase in sales which will directly help in increasing the wages for the employees . So foreign will have high wages .