Hecksher-Ohlin Model Mexico and Brazil each make t-shirts and televisions. The two countries have identical preferences and technologies. T-shirt manufacturing uses labor intensively, while television manufacturing uses capital intensively. Brazil is relatively capital abundant. a) Draw a carefully labeled diagram showing possible PPFS for the two countries. In one sentence explain why they have the shapes you have drawn. b) Add preference (DD) lines and show what the two countries will produce and consume in autarky. Explain in words why at the equilibrium the indifference curve is tangent to the PPF. c) Now illustrate on your diagram the equilibrium with free trade hetween the two countries. Compare relative prices of the t-shirts and televisions in the two countries before and after the opening of trade. d) What effect will opening trade have on the wages in Mexico? Explain your answer and provide intuition. e) Do you expect that opening trade will lead to equal wages in Mexico and Brazil? Why, or why not?
Hecksher-Ohlin Model Mexico and Brazil each make t-shirts and televisions. The two countries have identical preferences and technologies. T-shirt manufacturing uses labor intensively, while television manufacturing uses capital intensively. Brazil is relatively capital abundant. a) Draw a carefully labeled diagram showing possible PPFS for the two countries. In one sentence explain why they have the shapes you have drawn. b) Add preference (DD) lines and show what the two countries will produce and consume in autarky. Explain in words why at the equilibrium the indifference curve is tangent to the PPF. c) Now illustrate on your diagram the equilibrium with free trade hetween the two countries. Compare relative prices of the t-shirts and televisions in the two countries before and after the opening of trade. d) What effect will opening trade have on the wages in Mexico? Explain your answer and provide intuition. e) Do you expect that opening trade will lead to equal wages in Mexico and Brazil? Why, or why not?
Chapter2: Productions Possibilities, Opportunity Costs, And Economic Growth
Section: Chapter Questions
Problem 9SQ
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Transcribed Image Text:Hecksher-Ohlin Model
Mexico and Brazil each make t-shirts and televisions. The two countries have identical
preferences and technologies. T-shirt manufacturing uses labor intensively, while
television manufacturing uses capital intensively. Brazil is relatively capital abundant.
a) Draw a carefully labeled diagram showing possible PPFS for the two countries. In one
sentence explain why they have the shapes you have drawn.
b) Add preference (DD) lines and show what the two countries will produce and
consume in autarky. Explain in words why at the equilibrium the indifference curve is
tangent to the PPF.
c) Now illustrate on your diagram the equilibrium with free trade hetween the two
countries. Compare relative prices of the t-shirts and televisions in the two countries
before and after the opening of trade.
d) What effect will opening trade have on the wages in Mexico? Explain your answer and
provide intuition.
e) Do you expect that opening trade will lead to equal wages in Mexico and Brazil? Why,
or why not?
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