Question

1-Home produces 2 goods X and Y . Home country has two factors of production, Labor and Capital. All consumers at Home have preferences over two goods that can be represented by the utility function U(X,) =XY . The factor requirements per unit of output of the two goods are also fixed and they are shown in the following table:

	Good X	Good Y
Labour	1/3	2/3
Capital	2/3	1/3

Home country has 360 units of Labour and 600 units of capital. Factors are mobile across sectors within Home country.

a. Which good is labour intensive , which good is capital intensive.

b. Assume the world relative price of X to Y is 1. Calculate production levels of good X and good Y . Calculate the consumption levels of good X and good Y . Calculate the amount of imports and exports. Calculate the wage rate and rental rate in terms of price of good X. Finally draw a graph and label all the variables you calculated above. Draw the home countries PPF and the indifference curve that the consumers' consumption bundle is on.

2. True or false? According to the Heckscher-Ohlin framework, if the US is skill-abundant and scarce in unskilled-labor, then the US will produce more skill-intensive goods. If telecommunications is a skill-intensive good, then the Heckscher-Ohlin framework implies that opening up to trade will increase the return to skilled workers relative to unskilled workers, as well as increase the ratio of skilled to unskilled workers within the telecommunications sector. Explain.

3-According to the Heckscher-Ohlin model, two countries can equalize wage differences by either engaging in international trade in goods or allowing labour and capital to freely move between the two countries. True or false? Explain using graphs.

Answer 1

good A will be labour intensive because it requires more units of labour to produce good A and good B will be capital intensive