Assume we have a Hecksher-Ohlin model. There are two countries (US, Mexico) producing two goods (Ipads (I), Jeans (J)). Assume I is relatively capital intensive in production and the Mexico is relatively capital abundant (it’s possible). Answer all of the following questions for each country.
(a) State the H-O Theorem. What will be the pattern of trade between the US and Mexico?
(b) Show the autarky equilibrium (Indifference curves, PPFs, price levels, quantities).
(c) Are your PPF’s straight, bowed, skewed? Why?
(d) Which country has a higher relative price for jeans? Why?
(e) Show what the trade equilibrium will look like using the PPFs in (b). Label the trade triangle as well as the quantity exported and imported by each country.
(f) Show what happens to the demand for labor relative to capital (RD) after trade. Label all curves and outcomes on the graph.
(g) What happens to real returns after trade? Is trade good?