Question

Consider a 2 good, 2 country, 2 factor Heckscher-Ohlin model. Taiwan is capital abundant. South Korea is labor abundant. Machinery is capital intensive to produce, textiles are labor intensive. The labor wage is w and the cost of capital is r. Consumers in the two countries have identical preferences over the two goods. Answer true or false for each statement below

a) In autarky, prices of textiles relative to machinery are higher in South Korea than in Taiwan

b) In autarky, w/r in South Korea is higher than w/r in Taiwan

c) Taiwan should specialize in textiles production and South Korea should specialize in machinery production

Answer 1

ANSWER :

a : False.Because in South Korea labour is abundant and textiles are labour intensive goods.So they can produce textiles cheaper than machinery. Hence prices of textiles relative to machinery are lower in South Korea than in Taiwan since there is no international trade .

b:False. As labour is abundant in South Korea, labour wage will be low compared to the cost of capital. Where as in Taiwan r is lower than w . Therefore w/r in South Korea is lower than in Taiwan.

c:False.Labour in tensive good -textile-is very expensive to produce in Taiwan since labour is scarce there.Taiwan should specialize in machinery as capital is abundant and South Korea should specialize in textile production.