Suppose that each unit of product A requires 5 units of capital and 2 workers and each unit of product B requires 4 workers and 1 unit of capital. Suppose this technology holds irrespective of factor prices (there is no factor substitution). All the other assumptions of the Heckscher-Ohlin model are satisfied. Suppose furthermore that, in the US, the wage and the price of capital are each equal to 200 without any trade (autarky) while the wage is 45 and the rent is 60 in Mexico.

(i) What is the price ratio without trade in each country? Show calculations

(ii) What is the pattern of trade between the two countries? Explain your answer.

(iii) Does this conform to the Heckscher-Ohlin theorem? Explain why or why not.

(iv) Suppose that the US and Mexico are in free trade. The international price of product A is 750 and that of product B is 500. Both countries continue to produce both goods. What is the wage rate and the rental price of capital in free trade? Show computations.


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