Home and Foreign both produce cars and food using labor and capital. In each country, labor and capital are both freely mobile across industries. It takes 5 units of labor and 3 units of capital to produce 1 unit of food, and 4 units of labor and 4 units of capital to produce 1 car. Home has 600 units of labor and 400 units of capital, while Foreign has 600 units of labor and 500 units of capital. Each country has the same relative demand curve, given by
Pf/Pc= 1.1 - .075 * Qf/Qc
(i) Which country is labor rich? Labor poor? Which good is labor intensive? Capital intensive? (ii) How much of each good will each country produce? (iii) For Home, find the relative price of food, the wage, and the rental price of capital in autarky (no trade). Draw the budget line for a Home worker and for the owner of 1 unit of Home capital. Note: the rental price of capital is the “wage” of capital. (iv) Do the calculation of (iii) for free trade. Draw the budget lines on the same diagram as you used for (iii). (v) Who in Home benefits from trade? Is it the scarce factor or the abundant factor? Who loses? The scarce factor or the abundant factor?