lEluestion 3 The Heckscher-Dhlin Model of Trade 10 marks l3+3+1+31 Assume two countries Norway {NOR} and Turkey ('I'UR} produce Machines (M) and Food {Fl using two factors, capital (K) and labour (L), which are mobile across sectors. The production of machines is capital intensive and food production is labour intensive. Further, Norway has 250 units of labour and 250 units of capital, while Turkey has 160 units of labour and 20-0 units of capital. The cost of labour is w. The cost of capital is r. a. [3 marks} Which country is capital abundant relative to the other country? Explain why. b. [3 marks} In the diagram below, draw the relative supply of machineslfood for each country in autarky {approximate positions]. Explain any difference across countries and identify the relative prices and quantities in equilibrium in each country in autarkv. {Hint: Remember that relative prices reflect opportunity costs]. C. PMIPF Ramon = Rrue QM {OF Now, suppose Norway.' and Turkev are free to trade. [1 mark] In the graph depicted in point (b) above mark the approximate relative price under free trade {assume the world market relative price falls in between the two countries' relative prices when in autarkv}. Describe the patterns of specialisation and trade. [3 marks] At free trade relative price, does Norway produce more or fewer machines relative to food in comparison to autarkv? Does Turkev produce more or fewer machines relative to food in comparison to autarkv? Mark these points of production at free trade price on the graph depicted in point {[1]