Continuing from Problem 7, we now use the factor price insensitivity result to compare factor prices across countries in the Heckscher-Ohlin model.
a. Illustrate the international trade equilibrium on the Home and Foreign production possibility frontiers. Hint: You can refer back to Figure 4-3 to see the international trade equilibrium.
b. Suppose that the only difference between Foreign and Home is that Foreign has more labor. Otherwise, the technologies used to produce each good are the same across the countries. Then according to the factor price insensitivity result, how will the wage and rental compare in the two countries?
c. Call the result in part (b) "factor price equalization." Is this a realistic result? You can refer back to Figure 4-9 to see wages across countries.
d. Based on our extension of the Heckscher-Ohlin model at the end of Chapter 4, what is one reason why the factor price equalization result does not hold in reality?