Question

Consider a hypothetical economy in which only computers and shoes are produced and in which computer production is capital intensive as compared with shoe production. If two resources are being used, capital and labor, then, in equilibrium, the labor/capital ratio would be

Answer 1

higher in the shoe industry.

Step-by-step explanation:

Since manufacturing shoes is more labor intensive than manufacturing computers, the labor/capital ratio will be higher in that industry. On the other hand, since manufacturing computers is more capital intensive, then the capital/labor ratio will be higher.

The Heckscher-Ohlin trade model is commonly used to explain how different countries can benefit from the abundance of certain resources that they possess when trading with other nations. It also explains how costs will vary depending on trade, e.g. if more capital is needed, the cost of capital will increase.