## Heckscher-Ohlin model

Question 1

1. Suppose that Germany and Italy have the factor endowments given in the table below:

GermanyItaly
Capital80 machines20 machines
Labor400 workers120 workers

Suppose further that the production requirements for a unit of manufacturing goods is two machines and eight workers, and the requirement for a unit of agricultural goods is one machine and eight workers.

Which good, manufacturing or agricultural, is relatively intensive in the use of capital? In labor? Show how you know. Which country would export agricultural goods? Why?

Your response should be at least 200 words in length.

Question 2

1. Suppose that there are two countries (Germany and Italy) two goods (computers and food) and two factors of production (skilled labor and unskilled labor). Also, assume that Germany is skilled-labor abundant while Italy is unskilled-labor abundant. Suppose further that computers are skilled-labor intensive and food is unskilled-labor intensive. What will happen to the wage of skilled labor relative to the wage of unskilled labor in each country following trade liberalization? Explain.

Your response should be at least 200 words in length.

Question 3

1. Suppose that before trade opens up, Brazil is at a point on its production possibility curve (PPC) where it produces 20 apples and 20 cars. Once trade opens up, the price of a car becomes two apples. In response, Brazil moves along its PPC to a new point where it is producing 30 cars and 10 apples. Is Brazil now better off? Explain.

Your response should be at least 200 words in length.

Question 4

1. Suppose that New Zealand receives an inflow of foreign direct investment (FDI). Additionally, assume that labor and capital are used in the production of corn and steel. Suppose that steel is capital intensive as compared with corn. Using the long-run specific-factors model, explain what happens to the output of each good.

Your response should be at least 200 words in length.