Consider a simplified example of two countries - Singapore and Indonesia - producing two goods - telecommunications equipment and electrical circuit apparatus.

Using all its resources, Singapore can produce either 50 telecommunications equipment, or 100 electrical circuit apparatus. Using all its resources, Indonesia can produce either 1,000 telecommunications equipment, or 5,000 circuit apparatus.

(a) Consider the case of constant opportunity cost. What will be the resulting patterns of trade, terms-of-trade, and the aggregate production and consumption? Provide a diagram to illustrate, with telecommunications equipment on the y-axis.

(b) It is found that contrary to the above, there is no complete specialisation in both Singapore and Indonesia.

Instead, Singapore partially specialises in telecommunications equipment, producing 40 units, while Indonesia partially specialises in electrical circuit apparatus, producing 4,000 units.

Using the Heckscher-Ohlin theory instead of the Ricardian theory, demonstrate this observation.

You are required to draw intuitive reference to the real-world context. Elaborate on the consequent trade effects, using diagrams where necessary.

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Part a Constant Opportunity Cost In a scenario of constant opportunity cost the countries will specialize in the production of the good in which they ... View the full answer