(Simplified version of Heckscher-Ohlin model)

b) Assume two countries (Trinidad and Jamaica) have identical tastes and technology, but Jamaica has more capital per labor unit than does Trinidad. Assuming the relative demand (ratio of demand for food to demand for manufactures) is independent of income, discuss how autarky goods prices and factor prices differ between the two countries, then discuss how trade affects factor prices in each country. Will factor prices be equalized between the two countries?

c) Modify the above model by assuming Jamaica's productivity in both sectors doubles. Thus, in Jamaica:

To produce food: (2/2) units of labor and (6/2) units of capital are required for each unit of F.

To produce manufactures: (6/2) units of labor, and (2/2) units of capital are required for each unit of M.

Trinidad's technology remains unchanged. Viewed in a Ricardian context, Jamaica has an absolute advantage in both goods but a comparative advantage in neither good (due to technology).

i. Find how this Jamaica's productivity change affects its autarky output prices and factor prices.

ii. Assuming free trade between Trinidad and Jamaica, what will the pattern of trade be? Will free trade equalize factor prices? Will trade eliminate the pressure for factor migration?