Discuss the increase in income inequality observed in the U.S. over the last 40 years from...

Discuss the increase in income inequality observed in the U.S. over the last 40 years from the perspective of the Heckscher-Ohlin Model. Analyze the potential causes of this increase and provide graphical illustrations if applicable.

Expert Solution

The case of income inequality is a byproduct of trade theory, where one will have a comparative advantage or the benefiter and the other party is the looser. if we will discuss the income inequality it is present in any mode of dual participation. whether it is in trade, business, or labor and capitalist any of these if anyone is gaining the other one is relatively loosing. So when we are discussing income inequality that shows the relation between the labor income and labor hour. if we tray to represent this relationship through Heckscher ohline theory, due to globalization the price of product may decrease to gain more profit by capital intensive country whereas the laborer will get low real income (we are considering lower real income for comparison) which will force them more down in poverty. so here both skilled and unskilled labor will suffer and unskilled labor will suffer more than the skilled one. Again in Heckscher ohline model, the owner of an abundant factor will gain where is the owner of scare factor will lose. so change in the price of skilled intensive good to unskill intensive good. gradually in the US the no. of unskilled labor increased. here technology played a significant role to differentiate the skilled and unskilled laborers. In figure when there is an increase in the ratio of Ws/Wu that means the skill upon unskill increase that means the employment will decrease due to the no. of skilled labor is less compare to unkilled.

if we will discuss the technology biased trade then skilled laborers will earn more income compared to unskill laborer and that twill create an income gap.

Rahul Sunny answered 7 months ago

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