Question

Consider a Heckscher- Ohlin model with two countries, Home and Foreign, two goods, tomatoes and wheat, and two factors of production, labor and land. Countries have identical technologies, so that a unit of tomatoes takes 10 hours of labor and 5 acres of land, and a unit of wheat takes 4 hours of labor and 8 acres of land. Assume Home has 100 hours of labor and 80 acres of land, while Foreign has 60 hours of labor and 40 acres of land.

c) Given that consumers have the same preferences in the two countries, which good is relatively cheap in Home under autarky? (Hint: Base your answer on your graph from question (b)).

d) if the supply of land in Home increases, how does the production possibilities frontier change? What is the implication of this result? (i.e., which theorem do you use?)

Answer 1

c) under autarky tomatoes will be cheaper in home country because home country is abundant in land and tomatoes use more labour for  production.

d) if the supply of land in home increases the production possibility frontier changes in favour of wheat production. the production of wheat will increase more than the production of tomato. this theory is called Rybczynski theorem. the theorem states that when the endowment of a factor changes the output produced with that factor of production increases more than the factor of production increase.