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Consider the simple Heckscher-Ohlin model discussed in class, with two countries, two goods, and two factors, and incomplete specialization. The two countries are China and the United States, the two factors are capital and labor, and the two goods are computers and textiles. You are given the following data on the factor endowments for China and the United States. China has a labor force of 50 million workers, and a capital stock of 10 thousand machines. The United States has a labor force of 25 million workers, and a capital stock of 50 thousand machines. Assume that machines and workers are comparable units.
1.) Suppose that the production of computers is capital intensive relative to textiles. Using the Lerner diagram, show graphically the equilibrium allocation of capital and labor in each industry in each country. Which country will have comparative advantage?
2.) Use a figure to show whether free international trade improves the standard of living in China and the United States as a whole, or not.
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