The relative factor abundance of the two countries

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Suppose that each unit of product A requires 4 workers and 1 unit of capital to produce, whereas each unit of product B requires 5 units of capital and 2 workers and that it is the case irrespective of prices (no factor substitution). All the other assumptions of the Heckscher-Ohlin model are satisfied. Suppose that in autarky the wage and rent each equal 100 in the England while in France the wage is 90 and the rent is 120.

(i) What does this indicated about the relative factor abundance of the two countries. Explain.

(ii) Suppose that England and France enter into free trade. The international price of product A is 550 and that of product B is 770. Both countries continue to produce both goods. What is the wage rate and the rental price in free trade? Show computations to get your answer.

Reference no: EM13862760

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