Consider two countries, the U.S. and Bangladesh, trading two goods, shoes and food. There are two factors of production, labor and capital. Assume that the production of shoes is relatively more capital intensive than the production of food in the U.S. Instead, the production of shoes is relatively more labor intensive in Bangladesh than the production of food. Assume that the U.S. is the capital abundant country and that Bangladesh is labor abundant. Both goods are produced by both countries in equilibrium. Illustrate the initial factor prices and factor intensities in a carefully drawn and labeled diagram with capital on the y-axis and labor on the x-axis, and indicate the cone(s) of diversification. Assume that the world price of shoes declines, but that both countries' continue to produce both goods. Illustrate the effect of this change in either the same or a new diagram. How do the real returns to both factors change in the two countries? Explain whether your findings are consistent with the Stolper- Samuelson Theorem.

Consider two countries, the U.S. and Bangladesh, trading two goods, shoes and food. There are two factors of production, labor and capital. Assume that the production of shoes is relatively more capital intensive than the production of food in the U.S. Instead, the production of shoes is relatively more labor intensive in Bangladesh than the production of food. Assume that the U.S. is the capital abundant country and that Bangladesh is labor abundant. Both goods are produced by both countries in equilibrium. Illustrate the initial factor prices and factor intensities in a carefully drawn and labeled diagram with capital on the y-axis and labor on the x-axis, and indicate the cone(s) of diversification. Assume that the world price of shoes declines, but that both countries' continue to produce both goods. Illustrate the effect of this change in either the same or a new diagram. How do the real returns to both factors change in the two countries? Explain whether your findings are consistent with the Stolper- Samuelson Theorem.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

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Consider two countries, the U.S. and Bangladesh, trading two goods, shoes and food. There
are two factors of production, labor and capital. Assume that the production of shoes is relatively more
capital intensive than the production of food in the U.S. Instead, the production of shoes is relatively more
labor intensive in Bangladesh than the production of food. Assume that the U.S. is the capital abundant
country and that Bangladesh is labor abundant. Both goods are produced by both countries in equilibrium.
Illustrate the initial factor prices and factor intensities in a carefully drawn and labeled diagram with capital
on the y-axis and labor on the x-axis, and indicate the cone(s) of diversification.
Assume that the world price of shoes declines, but that both countries' continue to produce both goods.
Illustrate the effect of this change in either the same or a new diagram. How do the real returns to both
factors change in the two countries? Explain whether your findings are consistent with the Stolper-
Samuelson Theorem.

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