1. Assume a Heckscher-Ohlin world. The two countries are China and the U.S. The two goods are wheat and cloth and the two factors are labor and capital. Suppose each ton of wheat requires 4 units of capital and 1 unit of labor while each ton of cloth requires 2 units of capital and 4 units of labor. China has 2,000 units of capital and 10,000 units of labor. The U.S. has 4,000 units of capital and 4,000 units of labor.

(a) Which country has a comparative advantage in producing cloth? Why?

(b) The owners of capital in China will lobby for free trade. Do you agree or disagree? Explain.

(c) Considering the real world as you know it, how might you qualify your answer to part (b)?

(d) "Assuming the Heckscher-Ohlin model, opening trade between China and the U.S. would cause the cloth industry in China to become more capital intensive than before trade." Do you agree or disagree? Explain clearly.