[H-O model]

Consider an economy in which two factors of production, labor and capital, produce two goods, capital-intensive pharmaceuticals and labor-intensive clothing. Suppose that both factors of production are freely mobile across both industries, and that all producers, consumers, capitalists and workers are price-takers.

Suppose that there are currently steep tariffs on all imported goods, but there is a bill before Parliament to eliminate those tariffs, and the government has invited citizen representatives of workers and capitalists to express their opinions on the matter.

Suppose that all citizen representatives understand the consequences of eliminating the tariffs (that is they understand that the price of the imported good will decrease after tariff elimination), and suppose as well that each representative simply wants to maximize his or her real income.

The Parliamentary hearing takes testimony from four groups, representing workers in the clothing industry, capitalists in the clothing industry, workers in the pharmaceuticals industry, and capitalists in the pharmaceuticals industry, respectively.

(a) If this economy is capital-rich relative to the rest of the world, which of these four groups do you expect to support the tariff-elimination bill and which do you expect to oppose it? Why?

(b) Now, suppose that the country is labor-rich relative to the rest of the world, and answer the same question.