Reference no: EM132396902

International Trade Economics 4800

Practice Problem - Heckscher-Ohlin Model

I) Based on the following information and assumptions answer the questions below:

A)  There are 2 countries: A and B.

B)  There are 2 goods: cheese (c) and wine (w).

C)  There are 2 factors: capital (k) and labor (l).

D)  Country A is relatively well endowed with k.

E)  Country B is relatively well endowed with l.

F)  Cheese (c) is the capital intensive industry.

G)  A and B have identical preferences and technologies.

Questions

1) Illustrate, using the PPF-social indifference curve diagrams, the autarky position of these 2 countries.  Be sure to indicate the autarky domestic prices.  Explain your diagrams.

2) Which country will export cheese?  Why?

3) Illustrate the new equilibrium conditions for both countries after they have opened up to trade.  Explain your diagrams.

4) If as a result of a strong temperance movement in Country A their demand for wine drops significantly, is it possible for the trade pattern to reverse itself?  Explain.

5) Illustrate the situation in 4) graphically.