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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 the Foreign in labor abundant, it will be able to produce more of socks (labor abundant commodity). This explains the shape of PPF of the Foreign country.

Also, Foreign will specialise in the production of socks. The specialisation is incomplete because of the increasing opportunity costs.

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