You observe that knowing PM an

You observe that knowing PM and PD, you can solve for WG and WVin a system of two equations. Which theorem is this result thepunchline of? Explain the intuition of this theorem in the broadercontext if international trade.


– We believe this questions is referring to Heckscher–OhlinModel ,also known as the factor- proportions theory , where bothcapital and labor are variable factors of production.

– In the model each good can be produced with varyingcombinations of labor and capital. According to this model,differences in the relative endowment of these factors are thesource of a country’s comparative advantage. This model assumesthat technology in each industry is the same among countries, butit varies between industries.

– According to the theory, a country has a comparative advantagein goods whose production is intensive in the factor with which itis relatively abundantly endowed, and would tend to specialize inand export that good.

– Capital is relatively abundant in a country if the ratio ofits endowment of capital to labor is than that of its tradingpartner.12 This scenario means a country in which labor isrelatively abundant would export relatively labor- intensive goodsand import relatively capital- intensive goods.

– Because the Heckscher–Ohlin model has two factors ofproduction, labor and capital it allows for the possibility ofincome redistribution through trade.

– The demand for an input is referred to as a derived demandbecause it is derived from the demand for the product it is used toproduce.

– As a country opens up to trade, it has a favorable impact onthe abundant factor, and a negative impact on the scarce factor.This result is because trade causes output prices to change; morespecifically, the price of the export good increases and the priceof the import good declines. These price changes affect the demandfor factors used to produce the import and export goods, and henceaffect the incomes received by each factor of production.

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