Question: Consider the Heckscher-Ohlin model from the slides in the case of no factor substitution. The production technology of food and cloth are: QF = min [LF/3 , KF] QC = min [KC/3 , LC]. The home country has 100 units of labor and 80 units of capital, and the foreign country has 80 units of labor and 100 units of capital. The relative demand is DC/ DF = 1/ (PC /PF) in both countries.
1. What are the unit capital and labor requirements in each sector? What sector is capital intensive?
2. Assuming that all factors of production are employed, what are the quantities produced of C and F in each country?
3. What is the quantity exported or imported by each country in each sector under free trade?
4. Assume that PF = 1 under both autarky and trade. Show what happens to the return to each factor (w and r) and to the wage relative to capital return (w/r) in each country as each country moves from autarky to free trade. Which factor gains and which factor loses?