Question

Consider a 2x3 specific-factors model, with all associated assumptions, where HOME is a small country and has two sectors, (1) light manufactured goods and (2) industrial goods, and three factors, (i) capital (which is mobile between sectors), (ii) unskilled labor (which is specific to light manufactures) and (iii) skilled labor (which is specific to industrial goods).

(a) If the unskilled laborers express a strong preference against free trade, what does this suggest about HOME’s comparative advantage? Explain.

(b) If, as a result of opening to trade, we observe the nominal return to unskilled labor decreases, what does this suggest about the associated changes in the relative price of light manufacturers to 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.

Answer 1

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