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Consider a model where the Hecksher-Ohlin assumptions apply. There are two countries, Home and Foreign, two...

Consider a model where the Hecksher-Ohlin assumptions apply. There are two countries, Home and Foreign, two factors of production, labour and capital, and two goods, labour-intensive socks (S) and capital-intensive cars (C). Home is capitalabundant and Foreign is labour-abundant. Draw the Production Possibility Frontier (PPF) for Foreign. You must have S on the horizontal axis and C on the vertical axis. On your diagram show how much of each good Foreign produces at the world prices that both countries face. Label this point (the production point) as PF. Then show the consumption point that Foreign will achieve by engaging in trade. Label this point as CF.

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Answer #1

Since foreign is labor abundant nation, its PPC will show more of socks as compared to the cars.

At the world prices, Foreign will specialise in the production of socks. This is shown by PF. Note that there will be incomplete specialisation due to increasing opportunity cost or concave shape of PPF.

When Foreign engages in trade, it will import cars and exports socks and reaches its consumption point.

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