Problem Set 60-2




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    

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Last Updated on 7/4/00