Suppose that US has 2400 units of capital and 1600 units of labor, and that Sri...

Suppose that US has 2400 units of capital and 1600 units of labor, and that Sri Lanka has 600 units of capital and 560 units of labor. Also, suppose that production of each car requires 40 units of capital and 16 units of labor, and that production of each cloth requires 2 unit of capital and 4 units of labor. Suppose that the autarky wage rate and rent to capital in US each equal 30, and that the autarky wage rate and rent to capital in Sri Lanka are 10 and 50 respectively.

a. Which country is labor abundant and which one is capital abundant based on the physical definition of factor abundance? Support your answers with numbers. Which country is labor abundant and which one is capital abundant based on the price definition of factor abundance? Support your answers with numbers.

b. Which commodity is labor intensive and which one is capital intensive? Support your answers with numbers.

c. What is the autarky relative price of a car (to a cloth) in each country? Which country has comparative advantage in which product? Does your answer illustrate the Heckscher-Ohlin theorem? Support your answers with numbers. Also, state this theorem in words.

Suppose that there is free trade between the two countries and the world price of a car is 1800 and that of a cloth is 170 and that there is incomplete specialization in both countries.

d. What is the free-trade wage and rent in each country? Does your answer illustrate the Factor-Price-Equalization theorem? Support your answers with numbers. Also, state this theorem in words.

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Rahul Sunny answered 2 years ago

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