Question

1. The Heckscher–Ohlin model Home and Foreign have two production fac- tors, skilled and unskilled labor and produce two goods, textiles and com- puters. Home is skilled labor abundant, and computers are skilled labor intensive. Starting from a situation of autarky, the two countries liberalize trade. Assuming that the two countries produce both goods before and after trade liberalization, answer the following questions:

1. (a) What is the effect of trade liberalization on the relative price of com- puters at Home and in Foreign?

2. (b) What is the effect of trade liberalization on the output of computers and textiles at Home and in Foreign?

3. (c) What is the effect of trade liberalization on aggregate welfare in the two countries?

4. (d) What is the effect of trade liberalization on the real factor returns in Home and Foreign? Please provide a graphical explanation for your argument. What is the name of this famous result?

2. The Heckscher–Ohlin model Recently, computer programmers in devel- oping countries like India have begun doing some work formerly done in the United States. This shift has undoubtedly led to substantial pay cuts for some programmers in the United States. Answer the following two questions:

1. (a) How is it possible, when the wages of skilled labor are rising in the United States as a whole?

2. (b) What argument would trade economists make against seeing these wage cuts as a reason to block outsourcing of computer programming?

3. The Heckscher–Ohlin model This question asks you to review some of the empirical tests of the Heckscher–Ohlin model.

(a) Explain how the Leontief Paradox and the more recent results by Bowen, Leamer and Sweikauskas discussed in class and in the textbook contradict the predictions of the Heckscher Ohlin model.

(b) In the discussion of empirical results on the Heckscher Ohlin model, we noted that recent work suggests that the efficiency of production factors differ across countries. Explain how this would affect the concept of factor–price equalization.

Answer 1

Answer:

Summarising the given information :

2 countries – home and foreign

2 goods – textiles and computers

Home is skilled labour abundant country and computer is skilled labour intensive good that means home produces computer more cheaply than textiles

So, foreign will be unskilled labour abundant country and will produce textiles more cheaply than computers

In situation of autarky, the prices of abundant factor goods will be low in the country; the prices of computers will be relatively low in home country and prices of textiles will be low in foreign country as the textiles are unskilled labour intensive good and unskilled labour is cheaply available in foreign. While the prices of scare factor goods will be high due to low availability of factor of production.

In situation of trade, home will produce computer more cheaply so will export computers and will import textiles while foreign will export textiles and will import computers

   

1. when the two countries liberalise trade the relative price of computers at home will increase because before trade the prices were low and when country enters into trade the producers prefer to export their computers as the prices of computers are high in foreign country so as a result the prices of computers increases in the home while the relative prices of computers decreases in the foreign country because before trade the prices of computers were very high in the foreign country due to low availability of skilled labours and after trade foreign country imports computers from home country at low prices.
2. After trade liberalization the home country produces more computers as computer is skilled labour intensive good and home country is skilled labour abundant country so home country will increase the production of computers and will decrease production of textiles so the output of computers will increase in home country while the output of textiles will increase in the foreign country as foreign is unskilled labour intensive country and textiles are unskilled labour intensive good so it will increase production of textile and will decrease production of computers
3. The aggregate welfare will increase in both the countries due to trade liberalization because both the countries can efficiently produce the commodities in which they have factor endowment and can import the commodity at low prices which has high prices in their country it will also increase the consumer’s benefit which will lead to increase in overall economic efficiency.