Problem
Assume that there are two economies (Home and Foreign) producing two goods: wine and cheese, using two factors of production: capital and labour with Leontief technology. Production of oneunit of wine requires 16 units of labour and 8 units of capital, while production of cheese requires2 units of labour and 6 units of capital. Assume that Home has endowment of 1000 units of labour and 1000 units of capital, while Foreign has 2400 units of labour and 2000 units of capital.
1. Draw Lerner diagram presenting factor allocation for both countries and calculate allocations of labour and capital between the sectors.
2. Calculate production of wine and cheese in both countries.
3. What will be the trade pattern between these counties according to Heckscher-Ohlintheorem?
4. If capital endowment reduces in Home to 800 units, how will it change its productionstructure? Will this change affect trade pattern?
5. And what if the capital endowment was reduced to 400 units?