Suppose the U.S. and Mexico both produce 2 goods, tablets and cereal, using 2 inputs, capital (K) and labor (L). The production of tablets is capital-intensive, and that of cereal is labor-intensive. The U.S. is a capital-abundant country, and Mexico is labor-abundant. Consumers in the 2 countries have identical tastes. Use the Heckscher-Ohlin model to determine whether each of the following statements is true or false. Justify you answer fully, with the help of graphs if necessary.
a. “With free trade, the U.S. will export tablets to and import cereal from Mexico.”
b. “After trade, both the tablet and cereal industries in the U.S. will employ less labor relative to capital.”
c. “Trade will raise Mexican workers’ marginal product, which in turn raises their real wage.”