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Unformatted text preview: t supply and foreign impor t demand, at point D. At this relative pr ice, the quantity of comput ers that Home wants t o expo l increase the real ear nings of the factor used intensively in the production of that good and decrease the real ear nings of Study Guide Exam # 2 1. Heckscher-Ohlin model: shows how trade occurs between countries that have different resources. a. Assumptions of the HO-Model i. Two countries: home and foreign ii. Two factors: capital(K) and labor (L) iii. Two goods: computer & shoes b. Assumption # 1 i. Both factors can move freely between the industries c. Assumption # 2 i. Shoe production is labor-intensive; that is, it requires more labor per unit of capital to produce shoes than computers, so that Ls/Ks>Lc/Kc d. Assumption # 3 i. Foreign is labor-abundant, by which we me that the labor-capital ratio in Foreign exceeds that in Home, L*/K*>L/K. Equivalently, Home is capital-abundant, so that K/L>K*/L*....
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- Spring '11