ps2 - University of California Irvine Spring 2010 Priya...

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University of California, Spring 2010 Irvine Priya Ranjan 161 C Problem Set # 2 (Due on 4.23.10) 1. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Consider the production of hand-made rugs and assembly line robots in Canada and India. a) Which country would you expect to be relatively labor-abundant? Capital-abundant? Why? b) Which industry would you expect to be relatively labor-intensive? Capital-intensive? Why? c) Given your answers to (a) and (b), draw representative production possibilities frontiers for each country. Assuming that consumer preferences are the same in both countries, add indifference curves and relative price lines (without trade) to your PPF graphs. What do the slopes of the price lines tell you about the direction of trade? d) Allowing for trade between countries, redraw the graphs and include a “trade triangle” for each country. Identify and label the vertical and horizontal sides of the triangles as either imports or exports.
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