(A) Assume a Two-Country World with Two Factors of Production

question 16

Essay

(a) Assume a two-country world with two factors of production (capital and labor) and two goods. In this context, state the Heckscher-Ohlin theorem. Then indicate the two definitions of relative factor abundance. In addition, spell out what is meant by the assumption that one good is always relatively capital-intensive in its production process and the other good is always relatively labor-intensive in its production process.
(b) Illustrate and carefully explain the complications that are generated for the predictive ability of the Heckscher-Ohlin theorem regarding trade patterns when (i) the phenomenon of "demand reversal" exists and (ii) the phenomenon of "factor-intensity reversal" exists.

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