Question

Assume that the US and Mexico both have two different industry sectors. The first sector produces raw materials and the second sector assembles products based on the raw materials.Both sectors in both countries use only two input factors - unskilled labor and skilled labor.Both factors are mobile. The assembly sector uses unskilled labor intensively. The sector that produces raw materials uses skilled labor intensively. Without trade the US has a larger relative supply of raw materials to assembled products than Mexico. Countries do not differwith respect to demand.Answer all following questions using the Heckscher-Ohlin model.a) Relative prices:
a1) Without trade, is the relative price for raw materials to assembled products, i.e.,Pr/Pa, higher in the US or in Mexico? Briefly explain your answer (1-2 sentences are expected).(2 pts)
a2) Assume both countries open for trade. Compare the world relative price for raw materials to assembled products to the relative prices that result without trade inboth countries. Briefly explain your answer (1-2 sentences are expected).
b) Exports:
b1) Which good is exported by the US? Which good is exported by Mexico? Brieflyexplain your answer (1-2 sentences are expected).(2 pts)
b2) Which input factor is abundant in the US? Which input factor is abundant in Mexico? Refer to one of the theorems that we have discussed in chapter 5 tosupport your answer.(2 pts

Answer 1