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Suppose that Argentina has abundant capital and scarce labour compared with Brazil. Assume also that wheat is capital-intensive in comparison to cloth, and that other Heckscher-Ohlin assumptions of the 2X2X2 model apply (perfect competition, free trade, constant returns to scale, etc.). Using appropriate diagrams show the equilibrium points in each country before trade. Then show that mutually beneficial trade between these two countries is possible. Label the diagrams clearly to indicate the pattern of trade and show the final equilibrium points for consumption, production, imports and exports. Briefly explain in words the sequence of changes that occur as the two economies move from no trade to free trade.
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