Reference no: EM131169379
Suppose Australia is a capital (K)-abundant country, and Sri-Lanka is a labor (L)-abundant country. Both produce labor and capital intensive goods with the same technology. The production of food is capital intensive, and that of cloth is labor intensive. Use Heckscher-Ohlin model to answer the following questions:
a. Which of the two countries has a higher relative wage, w/r, before trade?
b. Which product is the labor intensive, and which is the capital intensive one?
c. What happens to the relative price of cloth in Australia as a result of trade? Does it increase or decrease?
d. Which country will export cloth as a result of trade?
e. What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease?
f. Would land owners in Australia lobby for or against free trade?
g. Would land owners in Australia lobby for or against free admittance of immigrant workers?
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