Final answer:
Cloth production, requiring more labor relative to capital, is labor intensive, while food production, with equal parts labor and capital, is relatively more capital intensive given the comparison with cloth production. The Home country is better suited for labor-intensive cloth production, whereas the Away country is more appropriate for relatively capital-intensive food production.
Step-by-step explanation:
To determine which product is relatively labor intensive and which is relatively capital intensive, we look at the input requirements for each product. Cloth production requires 4 units of labour and 1 unit of capital per unit of output, while food production requires 1 unit of labour and 1 unit of capital per unit of output. Since cloth production requires more labor in comparison to capital than food production, cloth is considered to be labor intensive. Conversely, since food production requires equal amounts of labor and capital, it is not specifically labor-intensive or capital-intensive; however, compared to cloth production, it is relatively more capital intensive.
The Home country, with 1000 units of labor and 300 units of capital, is better suited for cloth production because it has a larger supply of the required labor input. The Away country, with 500 units of labor and 400 units of capital, is better equipped for food production as it has a relatively larger proportion of capital necessary for that production. Firms might alter their production methods depending on the costs of labor and capital, often substituting capital for labor if labor becomes more expensive. This can affect the labor productivity in each country.