Consider a two-country world consisting of the US and Australia, that have only two resources, capital (machines) and labour, with which they can produce only two products, Steel and Wool. Steel production requires 200 units of capital and 40 units of labour. A ton of Steel sells for $1000 in the world market. Wool, on the other hand requires 10 units of capital and 60 units of labour for every kg of Wool produced. Wool sells for $50 per kg in the world market.
a) If the US has 50 million machines and 20 million workers, while Australia has 5 million machines and 40 million workers; what is the pattern of trade between these countries that will be predicted by the factor proportions (Heckscher-Ohlin) framework?
b) How will this trade affect the incomes of capital owners and workers in the wool industry in Australia? Apply your knowledge of an appropriate framework to illustrate this.