Between Home and Foreign, which produce clothing and food. Clothing is capital intensive and food is labor intensive. Home is capital abundant and Foreign in labor abundant.

a. For Foreign, draw the two-panel graph we did in class. The left-hand panel includes the SS curve, which relates the relative price ratio (PC/PF) to the relative factor prices in left-hand panel (w/r). The right-hand panel includes the relative factor demand curves (CC and FF), which relate the relative factor prices (w/r) to the input ratio used in a country of labor to capital (L/K) in each industry. Is CC or FF farther to the right and why?

b. When trade opens, which good will Foreign export and how do you know?

c. Assume that the price is at (PC*/PF*) before trade (which you can draw anywhere on the axis). Show what happens to the graph you drew in part (a) when trade opens between the two countries. Indicate what happens to the factor price ratio and labor-capital ratios in each industry.

d. Using what you showed in part (c), show/explain what will happen to real rents and real wages in Foreign when trade opens.

Answer rating: 100% (QA)

At any given wagerental ratio cloth production uses a higher capitallabor ratio further to the right ... View the full answer