Understand why the Heckscher-Ohlin model does not lead to complete specialization, in contrast to the Ricardian framework. Take the car-textiles example studied in this chapter. Recall that in our example, each of these goods is produced by capital and labor, but cars use capital more intensively. Now an increase in the relative price of cars will cause more resources to go into car production.

(a) Show that this flow of resources will cause the ratio of capital to wage income to rise.

(b) Which industry will be more adversely affected by the change in part (a)?

(c) Now combine the observations in parts(a) and (b) to show that textile production will still be profitable, though the total production of textiles will decline. Supplement your understanding by drawing production possibility frontiers, relative price lines, and the corresponding production points.