Suppose the world consists of two countries, Home and Foreign, which produce two goods, Food and Clothing, using two factors, capital and labor. Each...

1

Suppose that Home has 10 units of labor and 6 units of capital while foreign has 6 units of labor and 10 of capital.

(a) Draw the relative supply function at home, abroad, and for the world. What is the pattern of trade you would expect and why?

(b) What is the supply of food and clothing at home and abroad at the given relative price of 1?

(d) What are the factor prices at home in the trade equilibrium? Are they the same or different abroad?

(e) If the price of food rose slightly, what would happen to factor prices? Explain what is going on in the background to make these changes happen.

(f) Construct the factor price equalization region. Would the same outcome prevail if the countries just traded? Why?