Question
. In the Heckscher-Ohlin framework, suppose that the autarkic wage in country A is wA = $20 and the autarkic rental price of capital is
. In the Heckscher-Ohlin framework, suppose that the autarkic wage in country A is wA = $20 and the autarkic rental price of capital is rA = $40. In country B (with monetary values expressed in $ for purposes of comparison), the autarkic wage is wB = $30 and the autarkic rental price of capital is rB = $45. Also, suppose that good X is labor intensive and good Y is capital intensive. Then we can say that
the absolute wages (w), expressed in the same currency, will move further apart upon moving from autarky to free trade.
country B has a comparative advantage in good X, the rental price of capital in country B will fall upon moving from autarky to free trade.
country A has a comparative advantage in good X, and the wage in country A will rise upon moving from autarky to free trade.
the absolute rental prices of capital (r), expressed in the same currency, will move closer together, but not equalize upon moving from autarky to free trade.
the relative wages (w/r) will equalize, but not the absolute wages (expressed in the same currency) upon moving from autarky to free trade.
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