Problem
Workers employed in production of wine strongly support free trade, whereas workers employed in production of cheese are strongly opposed to free trade. What model of trade, and under what assumptions, can be used to explain these preferences? In the Heckscher-Ohlin model studied in the slides, suppose that K/L = K*/L* but preferences (as reflected in the relative demand RD) may be different between countries. Suppose that the home country has comparative advantages in food. In what country do consumers have stronger preferences for food? In the Heckscher-Ohlin model studied in the slides, where C is capital-intensive, Home is labor-abundant, there is no factor substitution, and both countries are incompletely specialized:
(a) Suppose the labor endowment at home increases. Discuss how this will impact the wage relative to the returns to capital at home when both countries are open to trade and when both countries are closed to trade.
(b) Suppose that labor migrates from Foreign to Home. How does the relative price under free trade change?
(c) Suppose that it costs tau % of the price of a good to ship it between countries. Is w/r larger, smaller, or the same as w*/r*? Why?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.