Question 1. This question helps you review the main graphs of the Heckscher-Ohlin model.
Consider the following Heckscher-Ohlin model. There are two countries, Home and Foreign. They produce merchandise and service using skilled labor and unskilled labor. The Home country is skilled-labor abundant, and service is skilled-labor intensive. Consider the changes that take place in the Foreign country as it goes from closed economy to free trade. Assume that the price of service decreases while the price of merchandise remains unchanged.
(1) Graph the relative demand curves for skilled labor for merchandise and service. Be sure to label your axes and label your curves. (Hint: the vertical axis is skill premium, or skilled-labor's wage relative to unskilled-labor's wage. The horizontal axis is skilled-labor intensity, or skilled-labor's employment relative to unskilled-labor's employment.)
(2) Graph the relative demand curve for skilled labor for the foreign country under closed economy, and the relative supply curve of skilled labor, in your picture in (1) above. Be sure to label your curves.
(3) Graph the shifting of the relative demand curve for skilled labor for the foreign country as it goes from closed economy to free trade, in your picture in (1) above.
(4) How does the skill premium change in the Foreign country? What is the intuition of this result?
Question 2. This question helps you review the main elements of the Heckscher-Ohlin model.
Consider the following Heckscher-Ohlin model. Portugal has 700 workers and 600 units of capital, and France has 1800 workers and 1200 units of capital. Technology is identical in both countries. Wine is capital intensive and cloth is labor intensive.
(1). France is relatively capital abundant.
(2). France exports cloth when trade with Portugal opens up.
(3). Going from no-trade to free-trade, the capital employment of wine decreases in Portugal.
(4). Going from no-trade to free-trade, capital becomes less productive in France for both wine and cloth.
(5). Going from no-trade to free-trade, the capital-labor ratio increases for wine in Portugal.
(6). Going from no-trade to free-trade, the marginal product of labor increases for cloth in Portugal.
(7). French workers support free trade.
(8). Portuguese workers are opposed to placing restrictions on trade.
(9). Going from no-trade to free-trade, the real income of Portuguese capitalists in terms of wine decreases.
For questions (10) - (12) below, assume that going from no trade to free trade, the price of cloth rises by 10% for France, and the price of wine remains unchanged for France.
(10). The wage of all French workers increases by more than 10%.
(11). The purchasing power of French workers in terms of wine increases by more than 10%.
(12). The rental rate of capital in France decreases by more than 10%.