Exercise 1: Heckscher-Ohlin-Samuelson model (25 points)

Suppose cloth production requires 35 units of labor and 7 units of capital. Grain production requires 2.5 unit of labor and 8 units of capital.

a)Which inputs are used intensively in production of each good and why?

b)If Home country has 115 million of workers and a total supply of capital of 190 million, while Foreign has 58 million of workers and a total supply of capital of 85 million, which country is abundant in which factor?

c)What will be the pattern of trade under the Heckscher-Ohlin model?

d)If there is no trade, which good will be relatively cheaper in each country? If a free trade occurs, what will happen with relative prices of goods?

e)If a free trade occurs, what will happen with the factor prices? Does this happen in the real world? Explain why yes or why not.