Specific Factors Model

Consider a country that produces shirts and autos. Shirts are produced with sewing machines (specific factor) and labor while autos are produced using robots (specific factor) and labor. Labor is mobile between industries. The country is initially in autarky (no trade) and then goes to trade, which causes the relative price of autos in terms of shirts to increase.

Problem 1: Show how going to international trade affects the budget constraint of a laborer. Use the Beaker diagram and make sure to reference marginal products in your answer.

Problem 2: Show how going to international trade affects the budget constraint of the owner of a robot. Make sure to reference marginal products in your answer.

Heckscher-Ohlin Model

Home (H) and Foreign (F) produce autos and shirts using capital (K) and labor (L). Autos are capital intensive relative to shirts. Home is endowed with 500 units of capital and 200 units of labor while Foreign is endowed with 100 units of capital and 50 units of labor. All the other

Heckscher-Ohlin assumptions hold.

Problem 3: Draw a PPF-Budget Constraint-Indifference Curve diagram for each country that shows the autarky (no-trade) equilibrium, indicate what the country is producing and consuming in each equilibrium and the relative prices in this equilibrium.

Problem 4: Draw a PPF-Budget Constraint-Indifference Curve diagram for each country that shows the free trade equilibrium, indicate what the country is producing and consuming in each equilibrium and the relative prices in this equilibrium.

Problem 5: Suppose the two countries are trading. Then, activists in H succeed in banning trade. What happens to the real income of labor in F? Use the appropriate diagram in your answer.