Consider the following Heckscher-Ohlin model. Spain and Italy produce shoes and T-shirts using capital and labor. Spain is labor abundant and Italy is capital abundant. Shoes are capital-intensive and T-shirts are labor intensive.
For each statement below determine if it is true or false. Then briefly explain why.
Suppose both countries are in closed economy equilibria.
(1) Spain has a larger labor force than Italy (i.e. ) because Spain is labor abundant.
(2) In Italy, the shoes industry employs more capital than the T-shirt industry because shoes are capital intensive.
(3) The shoes industry has a lower labor-capital ratio than the T-shirts industry in both countries.
(4) The relative price of shoes, in terms of T-shirts, is lower in Italy than in Spain.