0.0 Comparative advantages through factor endowments To illustrate the benefi ts of specialization in the Heckscher-Ohlin model, fi rst draw the production possibility frontier as in Figure 0.0. This curve shows how much the economy can produce of two goods X and Y with whatever endowments of labour and capital that it has. Factor endowments also determine the relative price between the two goods, as the good that is produced using a scarce factor intensively will be relatively expensive. For example, typical developing countries are abundantly endowed with cheap labour but have comparatively little capital. Products such as cell phones, computers and cars that are produced using a large capital stock will be expensive in closed developing countries, because the low supply of capital will drive the price of capital – the interest rate – up. Conversely, rich countries are often well-endowed with capital but have high wages and therefore comparatively expensive labour. Products that are produced using labour intensively will therefore tend to be expensive. A relevant example of this type of product is agricultural produce, which developed countries often protect behind high tariff barriers. Consequently, the relative price of food is often substantially higher in rich countries than in developing countries