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Assume that only two countries, A and B, exist
Assume that only two countries, A and B, exist. Factor Endowments Labor Force Capital Stock Countries A B 45 20 15 10 Refer to the table above. If good X is labour intensive, then following the Heckscher-Ohlin Theory A) country B will export good X. B) country A will export good X. C) both countries will export good X. D) trade will not occur between these two countries. E) both countries will import good X.
Expert Solution
Answer) Correct option is (B) that is country A will export good X. According to Hecksher - Ohlin model country which is capital intensive will export capital goods and the one which is rich in labour will export labour intensive goods. Thus if we calculate L/k ratio of both the countries we will find that country A is Labour intensive thus it will export good X.
Country A L/K ratio - 45/15 = 3
Country B L/K ratio - 20/10 = 2
We can see that country A's Labour to Capital ratio is 3 which is greater than country B. Thus it will export good X.
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