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Chapter 5: The Heckscher-Ohlin Model (everything but empirical evidence)

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Economics

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Is a kinked line, as it is a product of two constraints

A bowed line

A line along the which the value of output is the same
Has a slope of =-Pc/Pf

Producers can choose how to use input (use different amounts of labour and capital). The mix depends on the relative cost of labour and capital (if the relative cost of capital is high, the producer will use more labour in their production)

Wages = w
Rental cost of capital = r

The relationship is the FF and CC curve on the diagram

On the diagram:
The curve shifted most to the right (outwards) will be the good that requires the most of Labour relative to capital → Labour intensive good

Vice versa - The most left curve is capital intensive

Downwards slope - substitution effect

in autarky, one-to-one relation ship as Pc/Pf=w/r → The price of the good is equal to the cost of the factors

combining the graphs

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They will converge between the autarky relative prices of the two countries