Suppose that Argentina has abundant capital and scarce labor compared with Brazil, and assume that wheat is capital-intensive relative to cloth and that other Heckscher- Ohlin assumptions of the 2 2 2 case apply.
(a) Using appropriate diagrams, show that mutually beneficial trade between the two countries is possible. Label the diagrams clearly to indicate the pattern of trade that occurs, and explain in words the sequence of changes that occur as the two economies move from no trade to free trade.
(b) Once a free-trade equilibrium is reached, if Brazil imposes a tariff on imports, what will be the effect on its ratio of wages to return on capital? Explain why.