Suppose there are two countries, Germany and India, and two goods, bicycles and

Question

Suppose there are two countries, Germany and India, and two goods, bicycles and textiles. Germany has a resource endowment of 42,444,325 units of labor and 8,873,941 million units of capital, while India has a resource endowment of 475,090,729 units of labor and 10,299,894 million units of capital. Each bicycle requires 100 units of capital and 10 units of labor to produce, and each unit of textiles requires 40 units of capital and 2 units of labor to produce.

a. Which good is capital intensive and which labor intensive?

b. Which country is capital abundant and which is labor abundant?

c. Prior to trade, which country will have a higher relative wage, and which will have a lower relative price of bicycles? Briefly, how would you explain this?

d. Which country will export which good once these countries open up to trade?

e. When these two countries move from no trade to free trade, who gains and who loses in the long run according to the factor endowments model? Explain yourself.

Explanation / Answer

The cost elements are given below: First Part

a) Working capital: It is the capital needed to maintain the daily operations of a business.

b) Landscaping cost: It is the cost of maintaining a particular area of the land.

d) Construction cost: The cost of building a house or any other building.

e) Insurance: Insurance is a fixed business cost

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