Demand functions and similar taste preferences

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Assume that the United States and Cambodia both have similar demand functions and similar taste preferences. The United States however is capital abundant while Cambodia is labour abundant. Assume that the two countries produce only two goods: capital-intensive good 1 and labour-intensive good 2. Currently, the two countries are in the process of negotiating a bilateral free trade agreement (FTA). Question: How can the Heckscher-Ohlin model be used to explain the positions taken by capital owners and labour owners in each country vis-a- vis a USA-Cambodia FTA. Please use diagrams with vertical and horizontal axis labelled as below in the answer. w, r, P2 and P1 denote the wage rate, capital rental rate, the price of good 2 and the price of good 1, respectively.

Reference no: EM133268159

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