Question 3 - The Heckscher-Ohlin Model of Trade 10 marks (3+3+1+3) Assume two countries Norway (NOR) and Turkey (TUR) produce Machines (M) and Food (F) 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 200 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 machines/food 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 autarky. (Hint: Remember that relative prices reflect opportunity costs).

PM /PF RDNOR = RDTUR QM/ QF