1. Heckscher-Ohlin Theorem: With two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good.
Assumption 1: Labor and capital flow freely between the industries.
Assumption 2: The production of shoes is labor-intensive as compared with computer production, which is capital-intensive.
Assumption 3: The amounts of labor and capital found in the two countries differ, with Foreign abundant in labor and Home abundant in capital.
Assumption 4: There is free international trade in goods.
Assumption 5: The technologies for producing shoes and computers are the same across countries.
Assumption 6: Tastes are the same across countries.
Stolper-Sameulson Theorem: Explains the relationship between relative price of output and real wages of factors used. In the long run, the increase in relative price of good will increase the real wages of factor used in production while decrease the wages of the other factor.
2.
a. See attachment
b. Relative price of shoes in foreign country will fall when opened to trade.
c. The foreign will demand more labor due to the increase in wages. (Attachment)
d. W/R will increase since the real rental will fall and the real wage will rise.
e. Real wage rises.
f. Real rental decreases.
3.
In Western Europe, the unskilled labor wages will fall with the increase in skilled labor wages and the real rental on capital will rise. In T, the wages will increase and rental on capital will fall. T will export more labor intensive good and Western Europe will export more capital intensive goods.