1 Consider the following data on the factor endowments of two countries A and BWhich country is relatively capital abundantWhich country is relatively labor abundantSuppose that good S is capital inte

1. Country A is relatively capital abundant because it has a higher capital-labor ratio (20 units of capital per worker) compared to Country B (10 units of capital per worker). Country B is relatively labor abundant because it has a higher labor-capital ratio (0.1 workers per unit of capital) compared to Country A (0.05 workers per unit of capital).

Since good S is capital intensive, the country with a relatively higher capital-labor ratio (Country A) will have a comparative advantage in producing good S. This is because it can produce more output of good S per unit of capital compared to Country B. Country B, on the other hand, will have a comparative advantage in producing good T, which is labor intensive.

2. Leontief's findings were considered paradoxical because they contradicted the predictions of the Heckscher-Ohlin model, which posits that countries will export goods that use their abundant factor of production and import goods that use their scarce factor of production. However, Leontief found that the U.S., which was relatively capital abundant, was exporting labor-intensive goods and importing capital-intensive goods.

Leontief himself explained this paradox by suggesting that the U.S. had a unique technological advantage in producing labor-intensive goods, which allowed it to export those goods despite being capital abundant. He also suggested that the Heckscher-Ohlin model may not fully capture the complexity of real-world trade patterns, which can be influenced by factors such as tariffs, transportation costs, and non-tariff barriers.

3. The theory of comparative advantage refutes the idea that international trade is a zero-sum game. According to the theory, countries can benefit from trade even if they are not equally efficient in producing all goods. Each country can specialize in producing the goods that it can produce more efficiently (i.e. have a lower opportunity cost) and trade with other countries for goods that they cannot produce as efficiently. This allows both countries to consume more than they could produce on their own, leading to gains from trade for both sides.

For example, suppose Country A can produce both shoes and computers, but it takes them 10 hours to produce one pair of shoes and 100 hours to produce one computer. Country B, on the other hand, can produce both shoes and computers, but it takes them 5 hours to produce one pair of shoes and 50 hours to produce one computer. Even though Country B is more efficient in producing both goods, it still has a comparative advantage in producing shoes because it has a lower opportunity cost of producing shoes relative to computers. Country A, therefore, should specialize in producing computers and trade with Country B for shoes, leading to gains from trade for both countries