International trade

Q8. Consider a model of trade between China and the USA, in which the only resources are labor L and capital K. Suppose the USA has 150 million workers and 12 trillion dollars in capital, while China has 600 million workers and 1 trillion dollars in capital. Each country produces only machines M and textiles T under perfect market conditions, using both labor and capital with constant returns to scale and diminishing marginal returns, though machine production is relatively capital- intensive. Assume preferences and available technologies are identical, and factors are equally productive between the two countries. (a) Graph the PPF's for both countries, with T on the horizontal axis, and show the autarky equilibria. Which country has the higher Pr/Pm ratio? Under perfect free trade between the two countries, what would the Heckscher-Ohlin theorem predict? Compare the free trade equilibria to the autarky equilibrium on your PPF graphs for the two countries. (b) According to the Stolper-Samuelson theorem, how would free trade affect the wage-rental (w/r) ratio in each country, and how would this in turn affect the capital-labor (K/L) ratios in each sector, in each country? Show this on the three-axis graph relating Pr/PN to w/r and K/L (c) In words, not graphs, explain how your predictions would be different if labor in the USA was five times as productive as in China. (d) True or False? Explain. The Rybczynski Theorem states that if the US has a comparative advantage in producing capital-intensive goods, then an increase in the endowment of capital of 10 percent in the US will lead to a less than 10 percentage point increase in the production of capital-intensive goods