Consider a model of two stylized countries, called Germany and China. Germany is an advanced economy with a long tradition of manufacturing highquality goods. China is less developed, but has become the world’s secondlargest economy by focusing on exporting manufactured goods. Imagine that Germany and China produce only two goods: machine tools (such as precision cutting tools for a car factory) and consumer electronics (like MP3 players, personal computers and TVs). Furthermore, assume that Germany has an absolute advantage in producing both goods, and a comparative advantage in producing machine tools. In the framework of the HeckscherOhlin model discuss the welfare effects of a drop in the relative price of consumer electronics in China.
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