Assume two goods, X and Y, two factors, capital and labor, constant returns to scale, and a technology where good Y is relatively intensive in its use of capital, and good X is relatively intensive in its use of labor. In addition, assume two countries, where the home country is relatively

well endowed with capital, and the foreign country with labor.

(a) From this information, use the appropriate diagrams in input-space (isoquants) and goods-space to pin down the location of the production possibility frontiers for each country.

(b) Show each countrys autarky equilibrium, assuming they have similar consumer preferences. What do each countrys relative prices tell you about their comparative advantage?

(c) Using the production possibilities diagram, carefully describe the trade pattern that will occur when the two countries move from autarky to open trade.

(d) From your discussion in (c), state and carefully explain the Heckscher-Ohlin theorem.

(e) Suppose the home countrys supply of capital increases, and relative goods prices remain constant. Using the Edgeworth Box of production, explain what happens to output of Y and X, and how does it affect the shape of its production possibility frontier?