Question

In Hecksher - Ohlin Model, if product 1 is Capital intensive and product 2 is Labor intensive, why there is a positive relationship between w/r and P1/P2 we should explain it by referring to profit maximization

Answer 1

According to H-O model, labor abundant country will produce the labor-intensive product and capital abundant country will produce the capital-intensive product. If I assume here country is labor abundant that is (w/r) ratio is lower than another country. And produce the labor-intensive product, so the supply of labor-intensive product is more than the capital-intensive product. We know the price is increased when supply is less so the price of product 1 will be increased. The country will export labor-intensive product and import capital-intensive product. (w/r) the ratio will be increased until it equates with world factor price. So (w/r) and (P1/P2) are positively related.