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QUESTION
Hollywoodland, being self-sufficient in most products, trades only two goods with the Rest of the World (ROW), movies and automobiles.
- Hollywoodland, being self-sufficient in most products, trades only two goods with the Rest of the World (ROW), movies and automobiles. Both of these goods are produced using skilled labor (L) and capital (K) with the returns to capital being the interest rate (r) and the returns to skilled labor being the wage rate (w). The production of automobiles is capital intensive relative to the production of movies and Hollywoodland is skilled-labor abundant relative to the ROW.
- State the Heckscher-Ohlin theorem and use it to predict the pattern of trade between Hollywoodland and the ROW.
- If the price of Hollywoodland's imports rises, the price of its exports remaining unchanged, what would happen to the factor returns in Hollywoodland? State the theorem used to explain the answer and, briefly state the intuition behind the theorem.
