Assume that the United States and Cambodia both have similar demand functions and similar taste preferences. The United States however is capital abundant while Cambodia is labour abundant. Assume that the two countries produce only two goods: capital-intensive cars and labour-intensive shoes. Currently, the two countries are in the process of negotiating a bilateral free trade agreement (FTA). 

Part (a) Use the concepts of supply and demand to illustrate the situation of bilateral trade between the United States and Cambodia before the creation of their FTA. Note that before the creation of the FTA, both the United States and Cambodia use import tariffs. How can the Heckscher-Ohlin model be used to explain the positions taken by capital owners and labor owners in each country vis-à-vis a USA-Cambodia FTA. Students are recommended to use graph.

If an FTA between the United States and Cambodia is created, according to the Heckscher-Ohlin model what will happen to the total welfare of each country? Specifically, use the concept of Production Possibility Frontier (PPF) to graphically show the changes in the welfare of both countries following the creation of their FTA.

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Before the creation of the FTA both the United States and Cambodia impose import tariffs on goods This means that the domestic prices of capitalintens... View the full answer