Question

1 (15 points). Consider a 2x3 specific-factors model, with al l associated assumptions, where Home is a small country and has two sectors, (G) light manufactur is specific to light manufacturers) and (ii) skilled labor (which is specific to (a) If the unskilled laborers actors, () capital (which is mobile between sectors), () unskilled labor (which industrial goods). express a strong preference against free trade, what does this suggest about Home's comparative advantage? Explain. (b) If, as a result what does this suggest about the associated changes in the relative price of light manufacturers to of opening to trade, we observe the nominal return to unskilled labor decreases, industrial goods? Explain. (c) If, as a result of opening to trade, we observe the nominal return to capital increases, does this imply that capital owners are unambiguously better off? Explain. (d) If, as a result of opening to trade, we observe the nominal return to skilled labor increases, does this imply that skilled laborers are unambiguously better off? Explain. (e) Suppose, after opening to trade, Home experiences a significant inflow of foreign direct investment (FDI). What do you expect to happen to the production of light manufactures and the production of industrial goods? Explairn. (1) Suppose, after opening to trade, Home experiences a significant inflow of foreign direct investment (FDI). What do you expect to happen to the real return to capital? Explain. (o) Suppose, after opening to trade, Home experiences a significant inflow of foreign direct investment (FDD, What do you expect to happen to the real return to skilled labor? Explain. (h) Suppose you relying on your labor u are deciding between relying on capital as your primary source of income OR r as your primary source of income. Moreover, imagine you had to make sion before learning Home's comparative advantage. To what extent would you face a prim K-reward tradeoff in the context of this model? Explain.

Answer 1

Answer:

(A). As unskilled laborers are specific to light manufacturing,their strong preference against trade indicates that Home has acomparative advantage in industrial goods. This is because, in caseof free trade, light manufacturing products will be imported thusleaving these workers jobless.

(B). decreasing nominal return to unskilled laborers imply thatHome has a comparative advantage in industrial goods, thusthese products can fetch better prices in the export market. Hencethe relative price of the light manufacturer to industrial goodsdecreases.

(C). If the nominal return to capital increases, thisimplies that capital owners are better off. Due to free trade,capital owners of Home have incentives to produces these productsas compared to outside market due to their relative advantage.

(D).  If the nominal return to skilled laborersincreases, this implies that skilled laborers are better off.Due to free trade, capital owners of Home have incentives toproduces these products as compared to outside market due to theirrelative advantage.