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Suppose there exist 2 countries, Home and Foreign; 2 goods, X and Y; and 2 factors...

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Economics

Suppose there exist 2 countries, Home and Foreign; 2 goods, Xand Y; and 2 factors of production, labour (L) and capital (K).Each country can produce both goods. X is labour-intensive and Y iscapital-intensive. Home is labour-abundant and Foreign iscapital-abundant. Assume that the standard assumptions of theHeckscher-Ohlin model hold. When answering the following question,please support each of your arguments with detailedanalysis and draw the relevant diagrams to support youranswer.

Consider a move from autarky to free trade between the twocountries in both goods. Identify which group of people (labourersor owners of capital) gain and which lose in Home from the movefrom autarky to free trade. Discuss clearly how the assumptions ofthe model lead to this result.

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