Question 1: Consider a world with two countries (India and England), two goods (Aluminum and Steel), and two factors of production (labor and capital). India is relatively abundant in labor and Aluminum is relatively intensive in the use of labor.

a. using the Heckscher Ohlin theory predict which country would have the comparative advantage in producing Aluminum and which country would have the comparative advantage in Steel. explain your reasoning clearly?

b. What would be the pattern of trade establishment between India and England given your answer in (a. above) ?

c. Draw India's Production possibilities frontier to show what happens to the relative price of Aluminum (or the relative price of Steel) as India starts specializing in the good of its comparative advantage (measure Steel on y-axis and Aluminum on the x-axis).

d. what is the impact on the relative price of capital and the relative price of labor in India and England as it starts specializing in the good in which it has a comparative advantage?

e. what does the factor price equilibrium theory predict will occur as trade continues between India and England? be specific

f. As India and England trade with each other, would capital owners or labor be pro-trade or anti-trade in India and in England? Explain using the Stolper-Samuelson theorem?