. Heckscher-Ohlin Model: Suppose that a free-trade equilibrium exists in a twocountry, two-good, two-factor world. Assume...

. Heckscher-Ohlin Model: Suppose that a free-trade equilibrium exists in a twocountry, two-good, two-factor world. Assume that the two goods, chemicals (C) and electronic appliances (E), both employ capital (K) and labor (L), and that both factors are perfectly mobile across sectors. Also assume that: • The US is relatively capital-abundant • Mexico is relatively labor-abundant. • Chemicals are relatively capital-intensive. • Electronic appliances are relatively labor-intensive. • Assume that tastes and technologies are identical in the two countries.

a. Sketch the relationship between relative product price, relative factor price and relative factor use in each industry in the US and Mexico. (Under the assumption of identical technologies, the same curves can be used to describe the relationships in both the US and Mexico.)

b.Using the graph in part (a), label the relative price of electronics, the relative wage (w/r), and each industry’s relative employment of labor-to- capital in each country prior to trade (i.e. in autarky). Then make the following comparisons (write >, <, or =)

c. Before trading, is the real wage higher in the US or Mexico? Briefly explain why.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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