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In the H-O economy, the production of a clothing requires 4 labor units and 1...

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Finance

In the H-O economy, the production of a clothing requires 4 labor units and 1 capital unit, while the production of 1 unit of food involves the use of 1 unit of labor and 1 unit of capital. In the initial equilibrium in the COUNTRY, the volume of labor force (L) is 1000 and the volume of capital (K) is 500. The FOREIGN STATE has L = 1000, K = 1000.

1. If both goods were produced simultaneously, what would be the production volumes for each good?

2. After opening up to trade, in which goods would the country specialize (on the basis of which theorem)?

3. On the chart showing world supply and demand (RS, RS *, RD), present this situation. Let us assume that the amount of the labor force does not change, and the amount of capital in the country increases to 600.

4. How will the production of both goods change in this case? Which theorem considered this?

5. What will happen to the terms of trade? Mark this change in the COUNTRY PPF chart. Let us assume that the relative price of food increase.

6. What will happened in terms of rent and wages? Which theorem should be used. Mark that on the proper graph

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