Suppose there are two identical countries (Banana Republic and Apple Republic),

Question

Suppose there are two identical countries (Banana Republic and Apple Republic), except that they have their own specific factors. Both Banana Republic and Apple Republic have labor and capital and timber. They produce two goods: computers and funitures. Computers are produced with labor and capital and furniture is with labor and timber. Initially, both countires have the same supply of labor (100 units each), capital, and timber. Now suppose that the capitalstock in Banana Republic grows. If those two countires open up to trade, which country exports which good?

Explanation / Answer

Capital resources have increased in the Banana Republic means it has become capital abundant country. Capital has now become cheaper relatively. On other hand, Apple Republic has same situation of resources. Here, Banana Republic would be producing the Computer with the help of the Capital. On other hand, apple republic will specialise in the furniture and will get more supply of computer as comparison to home production of computer. In other words, importing computer from Banana would be cheaper.

Banana Republic will export computer and Apple Republic shall export Furniture.

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