(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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Definitions:

Selling Expense

Costs incurred directly related to the sale of a product or service, including advertising, sales commissions, and store maintenance.

Unavoidable Waste

Waste that cannot be reduced or eliminated during the production process due to inherent limitations or efficiency constraints.

Unexpected Spoilage

Loss or waste of materials, products, or resources that occurs unexpectedly during the production process and is not a part of planned spoilage.

Normal Spoilage

Normal spoilage refers to the expected amount of waste or loss of materials during a production process, considered as a usual and unavoidable cost of doing business.