Suppose that there are two factors of production, capital and labor, and that there are two industries, capital-intensive airplanes and labor-intensive automobiles, in the U.S. economy. Thus, there are four groups of factor owners:

Airplane capitalists (Boeing stockholders) Airplane workers

Automobile capitalists (GM & Ford stockholders) Automobile workers

a. If the U.S. is capital-abundant and the Heckscher-Ohlin theory is true (assuming factor mobility), what is the predicted direction of trade that is what does the U.S. export and import? i. In this case, which groups of factor owners do you expect will favor free trade and which will favor protection? Why? Explain.

b. Now consider what happens if there are one or more "specific" factorswho will be the winners and losers from trade under each of the following conditions (if some group's gains depend on what that group consumes, state who and explain why):

i. Capital and labor are both immobile, i.e., "specific" to each industry.

ii. Labor is mobile between the two industries, but the capital in each sector is specific and immobile (e.g., because of different types of machinery and equipment). Also, workers mainly consume automobiles not planes, meaning they spend more on automobiles than planes.

iii. Reverse of ii: Capital is mobile between the two industries, but labor (which has sector-specific skills) is immobile. Capital mainly consumers planes versus automobiles.

c. Now suppose instead that this trade follows a Krugman model of intra-industry trade (IIT) with scale economies, and that automobiles and airplanes are "differentiated products." Who would gain from the tradeand how would they gain? would there be any losers? Discuss.