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.

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?

Explanation / Answer

Ans

The answer is quite easy. L/k ratio is higher in India. So Germany will have more wage because it possesses less labour. Relative price of labour will a be less in India because cycle is labour intensive

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