Answer assuming the Heckscher-Ohlin model. Both oil and tea require labor and ca

Question

Answer assuming the Heckscher-Ohlin model. Both oil and tea require labor and capital in production. (15 points) Suppose Sri Lanka is labor abundant and Kuwait is capital abundant. a)Which good, according to the above PPF diagrams, is most likely labor intensive?

b. Draw the common indifference curves and show the relative prices in autarky on the graph above.

c. Which good will Sri Lanka have a comparative advantage in? ____________

d. Which good will Sri Lanka export? ____________

e. After trade opens the relative price of tea in Sri Lanka will _____________and the relative price of oil in Kuwait will ____________. (increase, decrease, indeterminate)

f. Wages in Sri Lanka will ___________ and wages in Kuwait will ____________ after trade. (increase, decrease, indeterminate)

g. Return to capital in Sri Lanka will ___________ and return to capital in Kuwait will ____________ after trade. (increase, decrease, indeterminate)

h. Suppose that the supply of capital in Sri Lanka increases, the output of _________ will increase and the output of __________ will decrease.

i. Do both countries gain from trade?

j. Does everyone in the country gain from trade?

Explanation / Answer

Answer assuming the Heckscher-Ohlin model. Both oil and tea require labor and capital in production. (15 points) Suppose Sri Lanka is labor abundant and Kuwait is capital abundant.

a)Which good, according to the above PPF diagrams, is most likely labor intensive?

Tea

b. Draw the common indifference curves and show the relative prices in autarky on the graph above.

c. Which good will Sri Lanka have a comparative advantage in? _____Tea_______

d. Which good will Sri Lanka export? ______Tea______

e. After trade opens the relative price of tea in Sri Lanka will _____increase________and the relative price of oil in Kuwait will _____incease_______. (increase, decrease, indeterminate)

f. Wages in Sri Lanka will ____rise_______ and wages in Kuwait will _____fall_______ after trade. (increase, decrease, indeterminate)

g. Return to capital in Sri Lanka will _____fall______ and return to capital in Kuwait will ___rise_________ after trade. (increase, decrease, indeterminate)

h. Suppose that the supply of capital in Sri Lanka increases, the output of ______oil___ will increase and the output of ___tea_______ will decrease.

i. Do both countries gain from trade?

yes

j. Does everyone in the country gain from trade?

no

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