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Show in graph. In a two country model with two goods and two factors, both countries...

Show in graph.
In a two country model with two goods and two factors, both countries have the same technology and equal endowments of labour. Although tastes are homothetic in each country, the ratio of capital- intensive to labour intensive consumption is lower for the foreign than for the home country, at any common set of product prices. If the home country exports capital-intensive good in this equilibrium, which country must have the smaller endowment of capital?

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Answer #1

The foreign country will have a smaller endowment of capital as compared to the home country. This is because home is specializing in the production of capital intensive good, thus home will have larger endowment of capital as per the Modern Theory of International trade. Also, ratio of capital intensive to labor intensive consumption is lower for foreign, thus foreign will specialize in production of labor intensive good and will have larger endowment of labor.

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