ECO203e: Demonstrate the Theory of Comparative Advantage in the Heckscher-Olin (HO): International Economics Assignment, SUSS, Singapore

Question 1

1. Demonstrate the theory of comparative advantage in the Heckscher-Olin (HO) theory of international trade.
2. Illustrate the two (2) implications on a) factor price equalization and b) income distribution from the Heckscher-Ohlin (HO) theorem.
3. Do transport costs and technology (product cycle) matter in international trade?

Assignment Brief:

Consider Thailand and Malaysia; both produce cars and computers. Thailand can produce two computers or one car using one unit of labour. Malaysia can produce 0.25 computer units or one car using one unit of labour. Thailand is endowed with 70 units of labour while Malaysia is endowed with 140 units of labour.

1. Draw the production possibility frontier for both Thailand and Malaysia.
2. If the pre-trade equilibrium is 80 computers and 30 cars for Thailand, and 20 computers and 60 cars for Malaysia, how does trade benefit both countries if 50 computers can trade for 50 cars?