PLEASE READ THE QUESTION! Suppose that the United States and Canada have the fac

Question

PLEASE READ THE QUESTION!

Suppose that the United States and Canada have the factor endowments as shown below. Suppose further that the production requirements for a unit of solar energy is four units of capital and one unit of land and the requirement for a unit of food is one unit of capital and three units of land.
................USA ..Canada
Capital ....200 .....150
Land .......400 ......75

e. Graph the H-O diagram for the relative price of food. In your graph include the autarky equilibrium for each country as well as the free trade equilibrium.
f. Graph the PPF, isovalues and indifference curves for each country. Show the change in welfare after trade has changed the relative price for each country. Make sure to mark exports and imports on each graph.

Explanation / Answer

Answer

a)

A unit of solar energy requires four units of capital and one unit of labour hence more capital is used than labor, hence Solar energy is a capital intensive good.

A unit of food requires one units of capital and three units of labour hence more labor is used than capital, hence food is a labor intensive good.

b)

According to H-O model, relative capital abundant country will export capital intensive good and relative labor abundant country will export labour intensive good. Land/Capital ratio of US is greater than Canada and Food is labor intensive good hence US will export food.

c)

Factor price equivilization means that price of factors will get equivilized across countries after the trade between the countries.

d)

According to H-O theory, both countries will support trade as trade is beneficial for both countries. But if we want to know which is more likely to support trade then it must be Canada, because Canada has less of both land and capital hence trade will be more beneficial to them.
Thank you

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