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. Which one of the following statements is correct?
A) Portugal will export wine and import cloth.
B) France will export wine and import cloth.
C) There is no basis for trade between France and Portugal.
D) Portugal will export cloth and import wine.

Question

Quizplus · Accepted Answer

Portugal has a relatively higher amount of capital compared to its labor force, making it more efficient at producing the capital-intensive good, which is wine. France, with a relatively higher amount of labor compared to its capital, is more efficient at producing the labor-intensive good, which is cloth. According to the Heckscher-Ohlin model, countries export the good for which they have a comparative advantage, so Portugal will export wine and import cloth.

Suppose Portugal Has 700 Workers and 26,000 Units of Capital