Question: Continuing from Problem, we now use the factor price insensitivity result to compare factor prices across countries in the HeckscherOhlin model.
a. Illustrate the international trade equilibrium on the Home and Foreign production possibilities frontiers. Hint: You can refer to Figure 4-3 to see the international trade equilibrium.
b. Suppose that the only difference between Foreign and Home is that Foreign has more labor. Otherwise, the technologies used to produce each good are the same across countries. Then, according to the factor price insensitivity result, how will the wage and rental compare in the two countries?
c. Call the result in part (b) "factor price equalization." Is this a realistic result? Hint: You can refer to Figure 4-9 to see wages across countries.
d. Based on our extension of the HeckscherOhlin model at the end of Chapter 4, what is one reason why the factor price equalization result does not hold in reality?
Problem: In this question, we use the Rybczynski theorem to review the derivation of the HeckscherOhlin theorem.
a. Start at the no-trade equilibrium point A on the Home PPF in Figure 4-2, panel (a). Suppose that through immigration, the amount of labor in Home grows. Draw the new PPF, and label the point B where production would occur with the same prices for goods. Hint: You can refer to Figure 5-9 to see the effect of immigration on the PPF.
b. Suppose that the only difference between Foreign and Home is that Foreign has more labor. Otherwise, the technologies used to produce each good are the same across countries. Then how does the Foreign PPF compare with the new Home PPF (including immigration) that you drew in part (a)? Is point B the no-trade equilibrium in Foreign? Explain why or why not.
c. Illustrate a new point A* that is the no-trade equilibrium in Foreign. How do the relative no-trade prices of computers compare in Home and Foreign? Therefore, what will be the pattern of trade between the countries, and why?
