Question

Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000 workers and 700 units of capital. Technology is identical in both countries. Assume that wine is the capital-intensive good and cloth is the labor-intensive good.

a. Given the information above, which country is labor abundant? Which country is capital abundant? Explain
b. According to the Heckscher- Ohlin theorem, which country should export wine and import cloth? Which country should export cloth and import wine? Explain.

Answer 1

(a)France is labor abundant because it has more workers than capital. Portugal is capital abundant because it has few workers and more capital

(b) Since France is labor abundant it should export cloth and import wine whil Portugal should export wine and import cloth.

Step-by-step explanation:

Solution

Given that

(a) France as a country is labor abundant as compared to Portugal which is a capital abundant. this is because, France has more number of workers than capital and Portugal possess more capital than workers.

(b) With reference to Heckscher-Ohlin theorem, a capital abundant country should export capital intensive good and the labor abundant country should export labor intensive good.

France should export cloth and import wine since it is abundant. while Portugal should export wine and import cloth.

With this, both the countries will be utilizing their abundant factors of production in an effective way. this will increase the production of both the countries.