question archive In the Home country only two goods are produced by perfectly competitive firms, Bananas and Cloth
In the Home country only two goods are produced by perfectly competitive firms, Bananas and Cloth
Subject:BusinessPrice: Bought3
In the Home country only two goods are produced by perfectly competitive firms, Bananas and Cloth. Each banana requires the use of 4 units of land and 1 unit of labor. Each unit of cloth requires the use of 1 unit of land and 4 units of labor. i. In autarky the price of bananas relative to cloth is 2. What is the return to land, wT , and the return to labor, wL measured in terms of cloth? ii. The country opens its markets to trade with the rest of the world and as a result the price of bananas relative to cloth falls to 1. According to the Heckscher-Ohlin theory this change in price reveals factor abundance in Home relative to the rest of the world. Is the Home country relatively land abundant or labor abundant compared to the rest of the world? Find the returns to labor and land in the Home country after it opens up to trade. Comment in light of the Stolper-Samuelson theorem
