Question

Heckscher-Ohlin Model 2. There are two countries, Home and Foreign. There are two goods: beer (6) and corn (C), which are produced in both countries using capital (K) and labor (L). In both countries, it takes 2 units of labor and 1 unit of capital to make beer (a Lb = 2, akb = 1); and it takes 5 units of labor and 5 units of capital to make corn (ale = 5, ako = 5). Home has 100 units of labor and 100 units of capital (L = 100, K = 100), while Foreign has 120 units of labor and 20 units of capital (L* = 120, K* = 20). (a) Which country is capital abundant? Which country is labor abundant? (b) Which good is capital intensive? Which good is labor intensive? (C) According to the Heckscher-Ohlin theorem, what is the pattern of trade for both Home and Foreign countries? (d) On a graph with the quantity of beer (QB) on the x-axis, and the quantity of corn (Qc) on the y-axis, draw the Home PPF. Which sector is it skewed towards? In autarky, what is the relationship between consumption and production? (e) On a graph with the quantity of beer (QB) on the x-axis, and the quantity of corn (Qc) on the y-axis, draw the Foreign PPF. Which sector is it skewed towards? (f) In the Home graph: Based on the pattern of trade derived earlier, draw the new world relative price ((PB/Pc)). Then draw the free-trade equilibrium, labeling the consumption point by C and the production point by B. Indicate clearly on the graph the quantity of imports and the quantity of exports. (g) In the Foreign graph: Based on the pattern of trade derived earlier, draw the new world relative price (PB/PCT). Then draw the free-trade equilibrium, labeling the consumption point by C* and the production point by B*. Indicate clearly on the graph the quantity of imports and the quantity of exports. (h) Does trade make the countries as a whole better or worse off? Are both the capital owners and workers in the Home country better off? What about the Foreign capital owners and workers? What can the Home and Foreign governments do? Hint: recall the Stolpher-Samuelson theorem.

Thank you so much.

Answer 1

Heckscher - Ohlin Model :- Tuoo goods 2. Two countries > Home ( y foreign Both both the the goods are produced in Bear (6) Conn (e) countries, using labon (1) t capital (K) both. Beer troduction: - a 16 = 2 are = 5 broduction: - com a c= 5 & ake = 5 Facton abundancy :- ② Home: @ Foreign: L = 100 * = 120 & + k=100 4 = 20 and @ country countory Foneign Home is is abundant abundant labon capital . labon intensive (6) Beer is belatively more than corn capital internire con is nelatively more than Beer . (c) As Home country is capital abendant, Home country should produce more and more of corn and expont it to Home so foreign country on the contrary, as foreign country is ex labon abundant, it should Produce more and more of Beer and export it to Home countory. So the pattern of trade for both the countries should be like, conn is expontable good to Home & importable to foreign and on the contrary, Bur so is exportable and to impontable fomein to Home country.

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s amount of Importable con » amount QB of Exportable Beur. the countries as a whole (h) Thade makes better off. the workers Both the the ecokital owners home acountrips better and off. in