Consider a 2(countries) x 2(sectors) x 2(factors) Heckscher-Ohlin model. Two countries are Home and Foreign, two sectors
Question:
Consider a 2(countries) x 2(sectors) x 2(factors) Heckscher-Ohlin model. Two countries are Home and Foreign, two sectors are Computers and Shoes.
Below is the information for Home in autarky.
Computers: Sales revenue: PCQC = 420
Payments to labor: WLC = 200
Payments to capital: RS K = 220
Shoes: Sales revenue: PSQS = 180
Payments to labor: WLS = 80
Payments to capital: RKS = 100
a. In Home, which sector is capital intensive? Explain.
Now imagine that Home and Foreign started to trade. Holding the input and output quantities in each sector constant, suppose that as a result of opening up to trade, the price of shoes decreases by 2% while the price of computers increased by 1%. Based on the information above, please provide the numerical answers to the questions below.
b. What is the corresponding percentage change in nominal wages? Explain.
c. What is the corresponding percentage change in the nominal rental rate of capital? Explain.
d. What is the percentage change in real wages in terms of shoes and computers? Explain.
e. What is the percentage change in the real rental rate of capital in terms of shoes and computers? Explain.
Expert Answer:
a In this 2 country 2 sectors and 2 factors HeckscherOhlin Model two countries and two factors include home and foreign and computers and shoes respectively Under autarky or no international trade the ... View the full answer
