Suppose that (1) capital-labor ratio (K/L) to produce 1 unit of computer is greater than the K/L to product 1 unit of grain in both Country A and Country B. (2) the ratio of total capital to total labor available in the Country A is greater than in the Country B. (3) The taste for computer and grain is the same in the both countries; (4) each country faces increasing costs of production; and (5) the same technology is available in both countries.
(i) In which country is the price of capital (i.e, the interest rate r) relative to the price of labor time (i.e, the wage rate w) lower? Why ?
(ii) Which country is isolation will have the lower equilibrium Pc/Pg? Why?
(iii) How trade causes a reduction in the difference in r and w between Country A and Country B.