A simple HO Model with rigid technology Assume home country is relatively labor-abundant country. L/K>L*/K* a lc C+a lf F=L; a kc C+a kf F=K; a lc C*+a lf F*=L*; a kc C*+a kf F*=K* Remember that techonology is assumed to be the same in both countries. Preference are identical in both countries. Assume same capital endowment in both countries, but home has 50% more labor force.
Figure 6.1 Production Possibilities: Rigid Technology
A simple HO Model with rigid technology The K-constraint line is assumed to intersect the labor-constraint line instead of lying everywhere above or below. Given clothing is relative labor-intensive, the capital- constraint line is flatter than the labor-constraint line. Point A is the only output combination for which both labor and capital are fully employed in foreign. Point S is the only output combination for which both labor and capital are fully employed at home.