Canada has 5,000 labor units and 2,500 capital units, while Mexico has 500 labor

Question

Canada has 5,000 labor units and 2,500 capital units, while Mexico has 500 labor units and 200 capital units. The production of a car requires 200 labor units and 300 capital units. The production of a guitar requires 10 labor units and 12 capital units. According to the Heckscher–Ohlin Theorem:

Select one:

a. Canada will export both cars and guitars to Mexico.

b. Canada will import both cars and guitars from Mexico.

c. Canada will export guitars to Mexico and import cars from Mexico.

d. Canada will export cars to Mexico and import guitars from Mexico.

Explanation / Answer

Ratio of Capital to labour in Car is (300/200)=1.5 and that for Guitar is (12/10)=1.2 as Car is more capital intensive then guitar which signals the comparative advantage is possible.

For Canada and Mexico under Full employment possibility we can say that ( Assume C for Car and G for Guitar)

Canada can produce maximum 8 cars and 8 guitar.

Mexico can produce only 15 guitars as no capital requirement met in its case.

Hence Canada can export cars to Mexico and import. Guitars from Mexico

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