Question

Consider the following data on the factor endowments of two countries, A and B: Labor Force (millions of workers) 45 20Capital Stock (thousands of machines) 15 10a. Which country is relatively capital abundant? b. Which country is relatively labor abundant? c. Suppose that good S is capital intensive relative to good T. Which country will have comparative advantage in the production of S? Explain.

Answer 1

ANSWER

a . Relatively Capital Abundant Country : B

b. Relatively Labour Abundant Country : A

c. Comparative Advantage in Capital Intensive Good : B

EXPLANATION

Labour abundant country is a country whose labour endowment (ownership) is more , compared to other country .

Capital Abundant country has capital endowment more compared to other country.

In this case ,

Country A has 45Labour > 20L in country B So , is labour intensive.

Country B has 15 capital > 10 C

So , is capital intensive .

As per H.Ohlin Comparitive Endowment theory , Ricardo Comparitive Advantage theory :

A country should specialise in producing goods which uses its 'abundant' factor 'intensively' , because it has comparitive cost advantage in production of that good (being it abudant & hence cheap) .

So , S Capital Intensive good should be produced by Capital Abundant Country B

Similarly , labour intensive good should be produced by country A

Answer 2

Answer:

a. Country A

b. Country B

c. Country A

Explanation:

Given

For Country A

Labor force = 45 million = 45000000

Capital Stock = 15 thousand= 15000

For Country B

Labor Force = 20 million = 20000000

Capital Stock = 10 thousand = 10000

a. Which country is relatively capital abundant

A country is capital abundant if its endowment of capital relative to other factors is large compared to other countries.

We calculate the capital/labor ratio for each country.

For A, Ratio = 45000000÷15000 = 3000

For B, Ratio = 20000000÷10000= 2000

The Ratio of country A is greater than B.

So, A is capital redundant.

b. Which country is relatively labor abundant

A country is labour abundant if its endowment of labour relative to other factors is large compared to other countries.

We calculate the labor/capital ratio for each country

For A, Ratio = 15000÷45000000 = 0.000333

For B, Ratio = 10000÷20000000 = 0.0005

The Ratio of country B js greater than A

So, B is capital redundant.

c. Suppose that good S is capital intensive relative to good T. Which country will have comparative advantage in the production of S?

Heckscher–Ohlin theorem in the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good"

So, if product S is capital intensive relative to T then country A will have more advantage in production of product T to aid their exportation.