Q1.Within the Heckscher-Ohlin framework, assume that good X is capital intensive and good Y is labor intensive. Consider the country under consideration to be a capital abundant country.(10)

a.Draw a representative PPF for this country. Mark a candidate production point and label it E0.(3)

b.In the diagram above, now show what happens if the capital stock in the country rises. Mark another candidate production point that reflects the change that occurred (in terms of a higher capital stock) and label this point E1. What happens to the PPF, the production point E0 and production of goods X and Y as a result of the increase in capital stock? Which theorem does this all change refers to?(7)

Q 2. There is a difference in factor prices across the countries in the absence of trade. However, International trade leads to factor price equalization.

a.Discuss the mechanism through which trade in goods leads to complete factor price equalization and which theorem this mechanism can be referred to in international trade literature.

Does factor price equalization hold in real world? Support your answer with rational and plausible justification?