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In: Economics

Suppose there are two countries (a capital-abundant country and a labor-abundant country) and two goods (labor-intensive...

Suppose there are two countries (a capital-abundant country and a labor-abundant country) and two goods (labor-intensive good X and capital-intensive good Y). The two countries have identical demand for the two goods and are considering forming a free trade agreement. However, while this agreement received support from most voters in country A, many voters in country B were concerned that the agreement will likely widen income inequality in country B.

  • Please identify which country is likely labor abundant and which country is likely capital abundant.
  • Use a graph to illustrate why income inequality is likely to widen in country B after the formation of the trade agreement according to the Heckscher-Ohlin model.
  • Discussion: what policy could be used to address the widening income inequality in country B?

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Rahul Sunny answered 1 year ago
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