Homework 3

UCDavis, 160a, SSII 2010 Prof. Farshid Mojaver

The Specific Factors Model
1. Starting from eqi!i"rim in the s#e$ifi$%fa$tors mode!, s##ose the #ri$e of
manfa$tred goods fa!!s so that &ages fa!! from W' to W in Figre (%6.
a. Sho& that the #er$entage fa!! in &ages is !ess than the #er$entage fa!! in the #ri$e
of manfa$tring, so that the rea! &age of !a"or in terms of manfa$tred goods
goes #.
Answer:
)s seen in the diagram, "oth the #ri$e of manfa$tred goods and the &ages de$rease.
*he +e, to this e-er$ise is to rea!i.e that the verti$a! distan$e of the de$rease
in &age is !ess than the verti$a! distan$e of /PM . MPLM. *herefore0
/PM . MPLM. >/W
&here /W re#resents the $hange in &age. Dividing "oth sides ", the initia! &age
W 1 PM . MPLM20
/PM 3 PM 1/W 3 W
*his is the desired res!t0 the #er$entage fa!! in the &age is !ess than the #er$entage fa!! in
the #ri$e of manfa$tring, so that the rea! &age of !a"or in terms of manfa$tred goods
goes #
b. 4hat ha##ens to the rea! &age of !a"or in terms of agri$!tre5
Answer: 6e$ase the &age de$reases and the #ri$e of agri$!tra! goods remains
the same, the amont of agri$!tra! goods that $an "e "oght ", !a"or de$reases.
*hat is, rea! &age de$reases in terms of agri$!tre.
6e$ase the &age de$reases and the #ri$e of agri$!tra! goods remains the same, the
amont of agri$!tra! goods that $an "e "oght ", !a"or de$reases. *hat is, rea! &age
de$reases in terms of agri$!tre.
c. )re &or+ers "etter off, &orse off, or is the ot$ome am"igos5
Answer: 6e$ase the rea! &age in$reases &ith res#e$t to manfa$tred goods and
de$reases &ith res#e$t to agri$!tre, the ot$ome &i!! "e am"igos for &or+ers. For
some, &ho #refer to #r$hase a !ot of agri$!tre, the #ri$e $hange means an overa!! !oss
in terms of ho& m$h the, $an ",. 7thers, &ho #refer to ", main!, manfa$tred
goods, gain in terms of ho& m$h the, $an ",.
3. 8ead the arti$!e ", 9ori :. ;!et.er and 8o"ert <. 9itan,= ) Pres$ri#tion to 8e!ieve
4or+er )n-iet,,> Po!i$, 6rief 01%2, Institte for Internationa! <$onomi$s, 4ashington,
DC, &&&.iie.$om3#"!i$ations3#"3#"01%2.htm. *hen ans&er the fo!!o&ing
qestions.
a. Under the most re$ent version of *rade )djstment )ssistan$e ?*))2 in the
United States, ho& man, e-tra &ee+s of nem#!o,ment insran$e ?UI2 are &or+ers
e!igi"!e for5 4hat t&o $riteria mst the, meet to qa!if, for this e-tra nem#!o,ment
insran$e5
Answer: =Under the most re$ent version of the *rade )djstment )ssistan$e
?*))2 )$t, qa!ified &or+ers ma, gain an additiona! @2 &ee+s of UI #a,ments, #rovided
the, are enro!!ed in an a##roved training #rogram. ) simi!ar #rogram, the Aorth
)meri$an Free *rade )greement *ransitiona! )djstment )ssistan$e ?A)F*)%*))2
#rogram, &as $reated in 1BB(. For e!igi"i!it,, &or+ers mst #rove that the, !ost their jo"
"e$ase of in$reased im#orts from, or a shift in #rod$tion to, either Canada or Me-i$o.>
b. Consider the #ro#osa! for =&age insran$e> that ;!et.er and 9itan ma+e in their
arti$!e. 4hat $riteria &o!d a &or+er need to meet to qa!if, for this insran$e5
4hat amont of e-tra in$ome &o!d the, re$eive from the insran$e5
Answer: =4age insran$e &o!d &or+ as fo!!o&s0 <!igi"!e &or+ers &o!d re$eive some
fra$tion of their &age !oss, &hi$h $o!d var, ", age and tenre of the &or+er for # to 2
,ears fo!!o&ing the initia! date of jo" !oss, "t &o!d "egin to "e #aid on!, &hen &or+ers
fond a ne& jo".>
=*o qa!if, for or #ro#osed s##!ementa! &age insran$e "enefit, &or+ers need on!,
do$ment that the, have "een Cdis#!a$edD a$$ording to $riteria simi!ar to the o#erationa!
definition of dis#!a$ement sed ", the 69S in its Dis#!a$ed 4or+er Srve,s ?#!ant or
$om#an, $!osed or moved, e!imination of #osition or shift, insffi$ient &or+2E that the,
had served at their #revios jo" for a minimm #eriod of time0 &e sggest 2 ,earsE and
that the, have sffered an earnings !oss ?from o!d jo" to ne& jo"2 . . .>
c. If ;!et.er and 9itanDs ne& #!an for =&age insran$e> had "een ado#ted ", the
United States, &hat &o!d have "een the "dgetar, $ost in 1BBB &hen nem#!o,ment
&as F.2G5 Ho& does this $om#are &ith the amont that is no& s#ent on nem#!o,ment
insran$e5
Answer: =)ssming a @0G re#!a$ement and s"sid, rate, the ta"!e indi$ates that or
&age insran$e and hea!th insran$e #rogram &o!d have $ost a"ot I2.B "i!!ion in 1BBB,
&hen the nationa! nem#!o,ment rate averaged F.2G.
=*he tota! $ost, !ess than IF "i!!ion, might have "een a major o"sta$!e &hen federa!
defi$its &ere high and gro&ing "t is not a #ro"!em no&, and in an, event &o!d "e
sma!! in re!ation to the more than I20 "i!!ion that is no& s#ent on nem#!o,ment
insran$e . . .>
4. S##ose t&o $ontries, Canada and Me-i$o, #rod$e t&o goods, tim"er and
te!evisions.
)ssme that !and is s#e$ifi$ to tim"er, $a#ita! is s#e$ifi$ to te!evisions, and !a"or is free
to move "et&een the t&o indstries. 4hen Canada and Me-i$o engage in free trade, the
re!ative #ri$e of te!evisions fa!!s in Canada and the re!ative #ri$e of tim"er fa!!s in
Me-i$o.
a. In a gra#h simi!ar to Figre (%6, sho& ho& the &age $hanges in Canada "e$ase of a
fa!! in the #ri$e of te!evisions, ho!ding $onstant the #ri$e of tim"er. Can &e #redi$t that
$hange in the rea! &age5
Answer: )s sho&n ", the fo!!o&ing figre, rea! &age fa!!s "t ", !ess than the
#er$entage de$rease in the #ri$e of te!evisions.
b. 4hat is the im#a$t of o#ening trade on the renta!s on $a#ita! and !and in Canada5
Can &e #redi$t that $hange in the rea! renta!s on $a#ita! and !and5
Answer: 6e$ase $a#ita! is s#e$ifi$ to the te!evision se$tor, the dro# in the re!ative #ri$e
of te!evision &i!! !ead to a fa!! in the renta! on $a#ita!. 4ith Canada e-#orting tim"er,
renta! on !and &i!! rise "e$ase !and is s#e$ifi$ to the tim"er indstr,.
c. 4hat is the im#a$t of o#ening trade on the renta!s on $a#ita! and !and in Me-i$o5 Can
&e #redi$t that $hange in the rea! renta!s on $a#ita! and !and5
Answer: *hrogh the e-#orts of te!evisions, the re!ative #ri$e of te!evisions &i!! rise in
Me-i$o, &hi$h &i!! !ead to an in$rease in the renta! on $a#ita!. 6, $ontrast, the renta! on
!and &i!! fa!!.
d. In ea$h $ontr,, has the s#e$ifi$ fa$tor in the e-#ort indstr, gained or !ost, and has the
s#e$ifi$ fa$tor in the im#ort indstr, gained or !ost5
Answer: In "oth $ases, the s#e$ifi$ fa$tor in the e-#ort indstr, ?i.e., !and in
Canada and $a#ita! in Me-i$o2 gained &hereas the fa$tor s#e$ified to the im#ort indstr,
?i.e., $a#ita! in Canada and !and in Me-i$o2 !oses &hen the t&o $ontries engage in trade.
5. Home #rod$es t&o goods, $om#ters and &heat, &here $a#ita! is s#e$ifi$ to
$om#ters, !and is s#e$ifi$ to &heat, and !a"or is mo"i!e "et&een the t&o indstries.
Home has 100 &or+ers and 100 nits of $a#ita!, "t on!, 10 nits of !and.
a. Dra& a gra#h simi!ar to Figre (%1, &ith the ot#t of &heat on the verti$a! a-is and
the !a"or in &heat on the hori.onta! a-is. 4hat is the re!ationshi# "et&een the ot#t of
&heat and the margina! #rod$t of !a"or in the &heat indstr, as more !a"or is sed5
Answer: See the fo!!o&ing gra#h.
)s more !a"or is added to the #rod$tion of &heat, the margina! #rod$t of !a"or de$!ines
so that a!thogh the ot#t of &heat $ontines to in$rease, the ot#t is in$reasing at a
de$reasing rate.
b. Dra& the #rod$tion #ossi"i!ities frontier ?PPF2 for Home &ith &heat on the hori.onta!
a-is and $om#ters on the verti$a! a-is.
Answer: See the fo!!o&ing gra#h.
b. Dra& the #rod$tion #ossi"i!ities frontier ?PPF2 for Home &ith &heat on the hori.onta!
a-is and $om#ters on the verti$a! a-is.
Answer: See the fo!!o&ing gra#h.
c. <-#!ain ho& the #ri$e of &heat re!ative to $om#ters is determined in the a"sen$e of
trade.
Answer: In the a"sen$e of internationa! trade, the re!ative #ri$e of &heat is the s!o#e of
the !ine tangent to the PFF and HomeDs indifferen$e $rve.
d. 8e#rod$e Figre (%@ &ith the amont of !a"or sed in &heat measring from !eft to
right a!ong the hori.onta! a-is, and the amont of !a"or sed in $om#ters moving in the
reverse dire$tion.
Answer: See gra#h "e!o&.
e. )ssme that "e$ase of internationa! trade, the #ri$e of &heat rises. )na!,.e the effe$t
of the in$rease in the #ri$e of &heat on the a!!o$ation of !a"or "et&een the t&o se$tors.
*he in$rease in the #ri$e of &heat shifts the PW MPLW $rve #&ard to PW'MPLW so
that the ne& eqi!i"rim is at #oint B. *he amont of !a"or sed in &heat in$reases from
0WL to 0WLJ, a!thogh the amont of !a"or devoted to $om#ter de$reases from 0CL to
0CL'. )!thogh the &age rises from W to W', the in$rease is !ess than the verti$a! shift of
the PW MPLW $rve given as /PW MPLW.
Heckshcer!hlin Model
"eopard# Answers
DI8<C*I7AS0 )s in the #o#!ar *K game sho&, ,o are given an ans&er to a qestion and ,o
mst res#ond &ith the qestion. For e-am#!e, if the ans&er is, La ta- on im#ortsL, then the $orre$t
qestion is, L4hat is a tariff5L
1. term sed to des$ri"e )rgentina if )rgentina has more !and #er nit of $a#ita! than 6ra.i!.
$. term sed to des$ri"e a!minm #rod$tion &hen a!minm #rod$tion reqires more
energ, #er nit of $a#ita! than stee! #rod$tion.
3. genera! term sed to des$ri"e the amont of a fa$tor needed to #rod$e one nit of a
good.
4. the t&o +e, terms sed in the He$+s$her%7h!in mode!E one to $om#are indstries, the
other to $om#are $ontries.
5. term sed to des$ri"e &hen the $a#ita!%!a"or ratio in an indstr, varies &ith $hanges in
mar+et &ages and rents
%. term des$ri"ing the ratio of the nit%$a#ita! reqirement and the nit%!a"or reqirement in
#rod$tion of a good.
&. the assm#tion in the He$+s$her%7h!in mode! a"ot nem#!o,ment of $a#ita! and !a"or.
'. inter#retation given for the s!o#e of the #rod$tion #ossi"i!it, frontier.
(. the H%7 mode! theorem that &o!d "e a##!ied to identif, the effe$ts of a tariff on the
#ri$es of goods and fa$tors.
"eopard# Answers
1). term sed to des$ri"e )rgentina if )rgentina has more !and #er nit of $a#ita! than 6ra.i!.
*and ab+ndant co+ntr#
11. term sed to des$ri"e a!minm #rod$tion &hen a!minm #rod$tion reqires more energ, #er nit of
$a#ita! than stee! #rod$tion.
Al+min+m is an ener,# intensi-e ind+str#
1$. genera! term sed to des$ri"e the amont of a fa$tor needed to #rod$e one nit of a good.
.nit Factor /e0+irement
13. the t&o +e, terms sed in the He$+s$her%7h!in mode!E one to $om#are indstries, the other to $om#are
$ontries.
*abor 1capital2 intensi-e ind+str#3 labor 1capital2 ab+ndant co+ntr#
14. term sed to des$ri"e &hen the $a#ita!%!a"or ratio in an indstr, varies &ith
$hanges in mar+et &ages and rents
4ariable factor proportions
15. term des$ri"ing the ratio of the nit%$a#ita! reqirement and the nit%!a"or reqirement in #rod$tion of a
good.
5apital intensit#
1%. the assm#tion in the He$+s$her%7h!in mode! a"ot nem#!o,ment of $a#ita! and !a"or. 6ero
1&. inter#retation given for the s!o#e of the #rod$tion #ossi"i!it, frontier.
!pport+nit# cost of prod+ction 17 in terms of 82
1'. the H%7 mode! theorem that &o!d "e a##!ied to identif, the effe$ts of a tariff on the #ri$es of goods and
fa$tors. StolperSam+elson Theorem
M+ltiple 5hoice 9+estions
1. In the 2%fa$tor, 2 good He$+s$her%7h!in mode!, the t&o $ontries differ in0
). tastes. D. re!ative avai!a"i!ities of fa$tors of #rod$tion.
6. mi!itar, $a#a"i!ities. <. !a"or #rod$tivities.
C. si.e.

2. In the 2%fa$tor, 2 good He$+s$her%7h!in mode!, a $hange from atar+, ?no trade2 to trade &i!!
"enefit the o&ners of0
). $a#ita!.
6. the re!ative!, a"ndant fa$tor of #rod$tion.
C. the re!ative!, s$ar$e fa$tor of #rod$tion.
D. the re!ative!, ine!asti$ fa$tor of #rod$tion
<. the fa$tor of #rod$tion &ith the !argest e!asti$it, of s"stittion.
(. 7ne &a, in &hi$h the He$+s$her%7h!in mode! differs from the 8i$ardo mode! of $om#arative
advantage is ", assming that '''''''''' is ?are2 identi$a! in a!! $ontries.
). fa$tor of #rod$tion endo&ments D. te$hno!og,
6. s$a!e e$onomies <. o##ortnit, $osts
C. fa$tor of #rod$tion intensities
F. )$$ording to the He$+sher%7h!in mode!,
). ever,one atomati$a!!, gains from trade
6. the s$ar$e fa$tor ne$essari!, gains from trade
C. the gainers $o!d $om#ensate the !osers and sti!! retain gains.
D. a $ontr, gains if its e-#orts have a high va!e added.
<. Aone of the a"ove.
@. Starting from an atar+, ?no%trade2 sitation &ith He$+s$her%7h!in mode!, if Contr, H is
re!ative!, !a"or a"ndant, then on$e trade "egins0
). &ages and rents sho!d rise in H.
6. &ages and rents sho!d fa!! in H.
C. &ages sho!d rise and rents sho!d fa!! in H.
D. &ages sho!d fa!! and rents sho!d rise in H.
<. Aone of the a"ove.
6. S##ose that there are t&o fa$tors, $a#ita! and !and, and that the United States is re!ative!, !and
endo&ed &hi!e the <ro#ean Union is re!ative!, $a#ita!%endo&ed. )$$ording to the He$+s$her%
7h!in mode!,
). <ro#ean !ando&ners sho!d s##ort US%<ro#ean free trade.
6. <ro#ean $a#ita!ists sho!d s##ort US%<ro#ean free trade.
C. a!! $a#ita!ists in "oth $ontries sho!d s##ort free trade.
D. a!! !ando&ners sho!d s##ort free trade.
<. Aone of the a"ove.
M. )ssme that on!, t&o $ontries, ) and 6, e-ist.
Consider the fo!!o&ing data0 Contries
Fa$tor <ndo&ments ) 6
9a"or For$e F@ 20
Ca#ita! Sto$+ 1@ 10
If good S is $a#ita! intensive, then fo!!o&ing the He$+s$her%7h!in *heor,,
). $ontr, ) &i!! e-#ort good S.
6. $ontr, 6 &i!! e-#ort good S.
C. "oth $ontries &i!! e-#ort good S.
D. trade &i!! not o$$r "et&een these t&o $ontries.
<. Insffi$ient information is given.
M5 9+estion: 1.D, 2.6, (.D, F.C, @.C, 6.6, M.6
False: Tr+e: !r .ncertain: ;<plain =h# ?Nestions in He$+s$her%7h!in *heor,2
9+estion 1
=7#ening # free trade does hrt #eo#!e in im#ort%$om#eting indstries in the short rn. 6t in
the !ong rn, &hen #eo#!e and resor$es $an move "et&een indstries, ever,"od, ends #
gaining from free trade.>
9+estion $
=)meri$an &or+ers gain from free trade &ith China "e$ase free trade !o&ers #ri$es of $!othing
in the United States and )meri$an &or+ers s#ent ver, !arge #ortion of their in$ome on $!othing>
Tr+e False 0+estions
9+estion1
=7#ening # free trade does hrt #eo#!e in im#ort%$om#eting indstries in the short rn. 6t in the !ong
rn, &hen #eo#!e and resor$es $an move "et&een indstries, ever,"od, ends # gaining from free trade.>
False > 7#ening # free trade is !i+e!, to hrt some #eo#!e. 7&ner of s#e$ia!i.ed fa$tors
in im#ort%$om#eting indstries and o&ners of fa$tors sed intensive!, in im#ort%
$om#eting indstries &i!! !ose from free trade "oth in the short and in the !ong rn.
9+estion$
=)meri$an &or+ers gain from free trade &ith China "e$ase free trade !o&ers #ri$es of $!othing in the
United States and )meri$an &or+ers s#ent ver, !arge #ortion of their in$ome on $!othing>
False > Free trade !o&ers $!othing #ri$es in the United States "t it !o&ers rea! &age of
)meri$an &or+er too. Sin$e &age in$ome is the main sor$e of )meri$an &or+ers &e
ma, $on$!de that their in$ome goes do&n &ith o#ening # trade &ith China.
1. *his e-er$ise ses the He$+s$her%7h!in mode! to #redi$t the dire$tion of trade.
Consider the #rod$tion of hand%made rgs and assem"!, !ine ro"ots in Canada and
India.
a. 4hi$h $ontr, &o!d ,o e-#e$t to "e re!ative!, !a"or%a"ndant, and &hi$h $a#ita!%
a"ndant5 4h,5
Answer :iven CanadaDs re!ative!, sma!! #o#!ation ?(0 mi!!ion $om#ared &ith more
than 1 "i!!ion in India2 and !eve! of deve!o#ment, it is a safe assm#tion that LCAN 3
KCAN O LIND 3 KIND. *hat is, there is more $a#ita! #er &or+er in Canada, ma+ing it
$a#ita!%a"ndant $om#ared &ith India. Simi!ar!,, India &o!d "e !a"or a"ndant.
b. 4hi$h indstr, &o!d ,o e-#e$t to "e re!ative!, !a"or%intensive, and &hi$h is $a#ita!%
intensive5 4h,5
Answer: :iven the amont of $a#ita! reqired to #rod$e ro"ots and the amont of !a"or
reqired to #rod$e rgs, one &o!d e-#e$t that LROBOT 3 KROBOT O LRUG 3 KRUG,
ma+ing ro"ots $a#ita! intensive and rgs !a"or intensive.
c. :iven ,or ans&ers to ?a2 and ?"2, dra& #rod$tion #ossi"i!ities frontiers for ea$h
$ontr,. )ssming that $onsmer #referen$es are the same in "oth $ontries, add
indifferen$e $rves and re!ative #ri$e !ines ?&ithot trade2 to ,or PPF gra#hs. 4hat do
the s!o#es of the #ri$e !ines te!! ,o a"ot the dire$tion of trade5
CanadaDs no%trade #rod$tion and $onsm#tion of ro"ots and rgs $orres#onds to a
re!ative #ri$e of ro"ots that is !o&er than that in India. *his is sho&n ", the f!atter s!o#ed
re!ative #ri$e !ine in Canada.
d. )!!o&ing for trade "et&een $ontries, redra& the gra#hs and in$!de a =trade triang!e>
for ea$h $ontr,. Identif, and !a"e! the verti$a! and hori.onta! sides of the triang!es as
either im#orts or e-#orts.
$. 9eontief Ds Parado- is an e-am#!e of testing a trade mode! sing a$ta! data
o"servations.
If 9eontief had o"served that the amont of !a"or needed #er I1 mi!!ion of U.S.
e-#orts &as 100 instead of 1P2,&o!d he have rea$hed the same $on$!sion5 <-#!ain.
Answer: If the amont of !a"or reqired for I1 mi!!ion of U.S. e-#orts &as 100 #erson%
,ears instead of 1P2, then the $a#ita!3!a"or ratio for e-#orts &o!d have "een I2@,@00 #er
#erson. 6e$ase this is !arger than the $orres#onding ratio for im#orts, this test &o!d
have #rovided s##ort for the He$+s$her%7h!in theorem. *hat is, the United States
?&hi$h &as assmed to "e $a#ita!%a"ndant in "oth $ases2 &o!d have "een sho&n to
e-#ort $a#ita!%intensive goods. In a$ta!it,, ho&ever, 9eontief Ds test sho&ed e-a$t!, the
o##osite.
3 )$$ording to the He$+s$her%7h!in mode!, t&o $ontries $an eqa!i.e &age differen$es
", either engaging in internationa! trade in goods or a!!o&ing s+i!!ed and ns+i!!ed !a"or
to free!, move "et&een the t&o $ontries. Comment.
Answer: )!!o&ing s+i!!ed &or+ers to migrate to s+i!!ed%!a"or s$ar$e $ontries and
ns+i!!ed &or+ers to migrate to ns+i!!ed%!a"or s$ar$e $ontries red$es the ratio of
s+i!!ed3ns+i!!ed &or+ers in the s+i!!ed%!a"or%a"ndant $ontr, and raises it in ns+i!!ed%
!a"or%a"ndant $ontr,. *his in$reases the &age ratio "et&een s+i!!ed and ns+i!!ed !a"or
in the s+i!!ed%!a"or%a"ndant $ontr, and !o&ers it in the ns+i!!ed%!a"or%a"ndant
$ontr,. 4hen the t&o $ontries trade in goods that em"od, these fa$tors, the s+i!!ed%
!a"or a"ndant $ontr, &i!! e-#ort the s+i!!ed%!a"or%intensive good. 6, doing so, it
effe$tive!, sends a !ot of s+i!!ed &or+ers and a fe& ns+i!!ed &or+ers to the ns+i!!ed
!a"or% a"ndant $ontr,. 9i+e&ise, &hen it im#orts the ns+i!!ed%!a"or%intensive good, it
effe$tive!, im#orts a fe& s+i!!ed &or+ers and a !ot of ns+i!!ed &or+ers. *he net effe$t is
s+i!!ed &or+ers in the ns+i!!ed%!a"or%a"ndant $ontr, see a fa!! in their &age re!ative to
ns+i!!ed !a"or and ns+i!!ed &or+ers e-#erien$e a rise in their re!ative &age, simi!ar to
that of migration.
4. )$$ording to the standard He$+s$her%7h!in mode! &ith t&o fa$tors ?$a#ita! and !a"or2
and t&o goods, movement of *r+ish migrants to :erman, &o!d de$rease the amont of
$a#ita!%intensive #rod$ts #rod$ed in :erman,. Dis$ss &hether this is tre or fa!se, and
e-#!ain &h,.
Answer: )n in$rease in a fa$tor of #rod$tion raises the #rod$tion of the good that ses
that fa$tor intensive!, and red$es the #rod$tion of the other good.
5. Consider the fo!!o&ing information on the fa$tor endo&ments of t&o $ontries0
Fa$tor <ndo&ments United States )stria
9a"or For$e (0 mi!!ion &or+ers 1@ mi!!ion &or+ers
Ca#ita! Sto$+ 200,000 ma$hines F00,000 ma$hines
a. *he $a#ita! to !a"or ratios are U.S.0 200,0003(0,000,000 1 23(00
)stria0 F00,00031@,000,000 1 F31@0 1 P3(00
Sin$e P3(00 Q 23(00, A+stria is relati-el# capital ab+ndant.
b. *he !a"or to $a#ita! ratios are U.S.0 (0,000,0003200,000 1 1@0
)stria0 1@,000,0003F00,000 1 1@03F
Sin$e 1@0 Q 1@03F, ..S. is relati-el# labor ab+ndant.
c. )stria has the $om#arative advantage in the #rod$tion of stee!, a$$ording to the
He$+s$her%7h!in *heorem, =6e$ase stee! ses )striaDs re!ative!, a"ndant fa$tor
?$a#ita!2 more intense!, in its #rod$tion than do te-ti!es. *herefore, )stria sho!d
#rod$e and e-#ort stee! ?a!thogh it ma, sti!! #rod$e some te-ti!es as &e!!, a$$ording to
H%7 theor,2.
%. Imagine a t&o good H%7 e$onom, &hi$h im#orts atomo"i!es and e-#orts &heat. S##ose
the #rod$tion of these t&o goods se on!, $a#ita! and !a"or. If the government raises a tariff on
the im#ort of atomo"i!es it &i!! raise the domesti$ #ri$e of atos. S##ose the #ri$e of &heat
remains $onstant. <-#!ain as a res!t of this tariff &ho in the e$onom, &i!! gain and &ho &i!! !ose
in rea! terms5
4ith an in$rease in #ri$e of )to re!ative demand shifts in favor of )to #rod$tion and
hen$e re!ative demand for Ca#ita! goes # ?re!ative demand for !a"or goes do&n2. *his
&i!! !ead to a de$rease in 9%; ratio em#!o,ed in the t&o se$tors &hi$h !o&ers rea! 4age
rates and in$reases rea! renta!s.
*ariff on )to im#orts PAR Q0 and so does the $ost of #rod$tion. Sin$e )to is $a#ita!
intensive domesti$ NA R demand for ;R 8R and 83PAR S 83PWR
Simi!ar!, $an sho& PAR1Q 93;T 1QMP9T 4T and 43PAT S 43PWT
8ent earners &in and 4age earners !ose
?roblem % Using a H7 frame&or+ dis$ss the effe$ts of U.S.%China trade on S+i!!ed%Uns+i!!ed &age ga# in US
and China. Do &e a$ta!!, see these #redi$ted effe$ts on s+i!!ed%ns+i!!ed &age ga#s in the t&o $ontries5 )re ,o
satisfied &ith this H7 e-#!anation of rising s+i!!ed%ns+i!!ed &age ga# in US5
H7 &o!d #redi$t that as res!t of trade "et&een s+i!!ed s$ar$e China and s+i!!ed
a"ndant US, #ri$e of s+i!!ed intensive #rod$ts in$rease in US ?de$rease in China2
a$$ording to SS this sho!d !ead to an in$rease in &ages of s+i!!ed !a"or ?a red$tion of
&ages of ns+i!!ed !a"or2. 4e e-#e$t the o##osite to ha##en in China. *hat is as res!t of
US%China trade &e e-#e$t s+i!!ed%ns+i!!ed &age ga#s to in$rease in US and to de$rease
in China.
4e o"serve the in$rease in s+i!!ed%ns+i!!ed &age ga#s in US "t &e do not see the &age
ga# red$tions &e e-#e$ted to see in China. If an,thing this has a$ta!!, in$rease in
China. H7 e-#!anation is not qite satisfa$tor, "e$ase, first &e are see $onf!i$ting effe$ts,
se$ond US trade &ith AICDs $onstittes on!, a sma!! fra$tion of tota! U.S s#endingE this is too
sma!! to e-#!ain the in$reased ga#.