Question

Suppose that the United States and Canada have the factor United States Canada endowments in the table to the right. Suppose further that the production requirements for a unit of cement are 3 machines and 12 workers, and the requirement for a unit of bread is 2 Capital 75 machines 45 machines Labor 225 workers 90 workers machines and 11 workers. After trade commences between the United States and Canada, it will be the case that the return to capital increases and the return to labor increases in in

Answer 1

In United States, K/L = 75/225 = 0.33 and in Canada, K/L = 45/90 = 0.5. As (K/L) is high in Canada, so Canada is capital intensive country and as it is low in United States, so US is labor abundant country.

Ratio of capital to Labor in cement production is (K/L) = (3/12) > ratio of capital to Labor in bread production, that is, (K/L) = 2/11. So cement is capital intensive good and bread is labor intensive good.

Therefore, according to Hecksher-Ohlin theory, if trade occurs then US should export bread and import cement. Canada should export cement and import bread. So return to capital increases in Canada and return to Labor increases in US.