HECKSCHER-OHLIN

Suppose that when Russia opens to trade with Germany, it imports automobiles, a capital-intensive good and exports vodka, a labour-intensive good. Note that trade is costless across countries.

(a) Show graphically the autarkic equilibrium (production, consumption and relative prices) for Russia and Germany. According to the Heckscher-Ohlin model was Russia a relatively capital- or labour-abundant country? Explain

(b) Describe the effects of trade openness on production, consumption and the real rents of capital and wages. Are the capitalists better off in Germany compared to Russia under free trade? Who will be in favour of free trade and who will be against it in Russia? Explain

(c) Consider now the hypothetical case in which factor price equalisation does not hold. Explain in detail and with the use of graphs one of the possible reasons why this would be the case.

(d) What is the Leontief Paradox? Explain how researchers have dealt with the Leontief Paradox.