2. Consider a world with two goods (steel and wine). There are two countries (Luxembourg and France) which have identical technologies and preferences. Assume that the production of wine is relatively labour intensive while the production of steel is relatively capital intensive. Assume that in a free trade equilibrium , Luxembourg produces only steel whereas France produces both goods. a) What can you say about the relative endowments of the two countries? Which trade theorem are you using to answer this question? b) There is free capital movement between countries of the European Union. Will there be any movement of capital between the two countries? c) If your answer to part (b) was affirmative, in which direction is capital going to flow? And what will be the effect of this capital movement on production in both countries? Which Trade theorem are you using to answer this question? d) What will be the effect of capital mobility on factor prices in the two countries? e) If in addition to capital mobility both countries decide to allow for Labour mobility, is there going to be migration of labour? If yes then in which direction? f) "The persistence of regional inequalities is much worse in Europe than in the U.S. because of the lack of labour mobility". Discuss this statement in light of your previous answers