Canada and the United States produce computers and chemicals using labor and capital as the only inputs in production. The United States is capital abundant, and Canada is labor abundant. Computer production is more labor intensive than chemical production in both countries. What does the Heckscher-Ohlin model predict will happen to prices of computers or chemicals in the two countries?

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, a capital-abundant country like the United States will have a comparative advantage in producing capital-intensive goods such as chemicals, while a labor-abundant country like Canada will have a comparative advantage in producing labor-intensive goods such as computers. Since computer production is more labor-intensive than chemical production in both countries, Canada will have a lower cost of producing computers and will therefore be able to sell them at a lower price. On the other hand, the United States will have a lower cost of producing chemicals and will be able to sell them at a lower price. Therefore, the price of chemicals should fall in the United States as it has a comparative advantage in producing them.

Canada and the United States Produce Computers and Chemicals Using