Question

Suppose there are two countries (a capital-abundant country and a labor-abundant country) and two goods (labor-intensive good X and capital-intensive good Y). The two countries have identical demand for the two goods and are considering forming a free trade agreement. However, while this agreement received support from most voters in country A, many voters in country B were concerned that the agreement will likely widen income inequality in country B.

1. Please identify which country is likely labor abundant and which country is likely capital abundant.
2. Use a graph to illustrate why income inequality is likely to widen in country B after the formation of the trade agreement according to the Heckscher-Ohlin model.
3. Discussion: what policy could be used to address the widening income inequality in country B?

Answer 1