Trade Problem Set 60 2-1

1. Suppose two countries, Malaysia and Thailand, can be described by a variable proportions Heckscher-Ohlin model. Assume they each produce rice and palm oil using labor and capital as inputs. Suppose Malaysia is capital-abundant with respect to Thailand while rice production is labor-intensive. Suppose the two countries move from autarky to free trade with each other. In the boxes below indicate the effect of free trade on the variables listed in the first column in both Malaysia and Thailand. You do not need to show your work. Use the following notation:

+    the variable increases
-    the variable decreases
0    the variable does not change
A    the variable change is ambiguous (i.e. it may rise, it may fall)

	in Malaysia	in Thailand
the price ratio Ppo/Pr
output of palm oil
output of rice
exports of palm oil
imports of rice
real wage in terms of palm oil
real wage in terms of rice
real rental rate in terms of palm oil
real rental rate in terms of rice
capital-labor ratio in palm oil production
capital-labor ratio in rice production

International Trade Theory and Policy - Chapter 60: Last Updated on 1/06/08