In the Heckscher-Ohlin model, suppose the two factors of production are: high-skilled labor (H) and regular labor (L). The two sectors are manufacturing and business services. Manufacturing uses regular labor more intensively, and business services uses high-skilled labor more intensively. The two countries are the U.S. and China, and the U.S. has a comparative advantage in business services. a. Illustrate the effect of opening up to trade on the U.S. with the PPF and indifference curve diagram. Make sure you clearly label everything. What happens to the relative price of business services in the U.S.? Show clearly the gains from trade. b. What happens to
In the Heckscher-Ohlin model, suppose the two factors of production are: high-skilled labor (H) and regular labor (L). The two sectors are manufacturing and business services. Manufacturing uses regular labor more intensively, and business services uses high-skilled labor more intensively. The two countries are the U.S. and China, and the U.S. has a
a. Illustrate the effect of opening up to trade on the U.S. with the
b. What happens to the relative wage of high-skilled labor? Does inequality (the skill premium) increase? Show all work and explain.
2. Evidence for or against Heckscher-Ohlin model
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Leontieff Paradox
i. Briefly describe the paradox
ii.We discussed several explanations for the paradoxical result in class. Brieflydescribe two explanations.
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Inequality
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When the two factors of production are high-skilled labor and regular labor, what are the implications of the Heckscher-Ohlin model for the skill premium for each of the two countries (one of which is abundant in high-skilled labor and the other of which is abundant in regular labor)?
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What is the evidence for these implications?
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