Question

Suppose there are 2 countries, Singapore (S) and Cambodia (C). Singapore has 1,000 units of capital and 250 units of labor while Cambodia has 300 units of capital and 500 units of labor. Motorcycles (M) are capital intensive and Belts (B) are labor intensive. Assume that the Heckscher-Ohlin (factor proportions) model applies in this case. a. Which country is capital-abundant? _______________ Which is labor-abundant? __________________ b. In autarky, which country will have the higher real returns to capital? _________________ Which country will have higher real wages of workers? _______________________ c. Let the two countries trade with each other. What will happen to the price of belts in Singapore (rise or fall)? _______________ To the price of motorcycles in Cambodia? _________________ What will happen to output of motorcycles in Singapore? ___________________ To output of belts in Cambodia? ______________________ d. Explain what will happen in the long run (that is, according to the Stolper-Samuelson theorem) to the real wages of workers and real returns of capital owners in Singapore, and why. Pay attention to the demands for capital and labor and what happens to the marginal products of capital and labor

Answer 1

a. Singapore is capital abundant because its capital labour ratio is higher than that of cambodia. Singapore's K/L= 1000/250= 4 Cambodia's K/L= 300/500= 0.6

Cambodia is labour abundant becuase its K/L is lower than that of singapore.

b. In autarky, Cambodia being labour abundant will have higher real returns to capital because labour is abundant and cheaply available in Cambodia. Singapore being capital abundant, will have scarce labour resources and so will have higher real wages of workers

c. With traded, Singapore will produce more of capital intensive good that is Motorcycles and export it to Cambodia, this means production of motorcycles will expand and which inturn means supply of motorcycles will expand relative to belts, causing its price to fall relative to belts in Singapore. So price of belts in singapore will rise and that of motorcycles will fall.

Cambodio on the other hand will produce more of labour intensive good which is belts and so its supply will rise causing its price to fall relative to motorcycles.

d. In the long run, according to the stopler-samuelson theorem, with the rise in production of motorcycles in singapore, demand for capital will rise and as a result of this real returns to capital will rise and real wages for labour will fall. In cambodia, with a rise in production of belts, demand for labour rises and as a result of this, real wages of labour will rise and real return on capital will fall.