Consider the following Heckscher-Ohlin model: there are two countries, America a

Question

Consider the following Heckscher-Ohlin model: there are two countries, America and China, two goods, high-tech manufactures and low-tech manufactures, and two factors of production, skilled labor and unskilled labor. America is skilled-labor abundant and China is unskilled-labor abundant. High-tech manufactures are skilled-labor intensive and low-tech manufactures are unskilled-labor intensive. a. What happens to the price of high-tech manufactures relative to the price of low- tech manufactures in America following trade? b. What happens to the wage of skilled labor relative to the wage of unskilled labor in America following trade?

Explanation / Answer

HO would predict that as result of trade between skilled scarce China and skilled abundant US, price of skilled intensive products increase in US (decrease in China) according to SS this should lead to an increase in wages of skilled labor (a reduction of wages of unskilled labor). We expect the opposite to happen in China. That is as result of US-China trade we expect skilled-unskilled wage gaps to increase in US and to decrease in China. We observe the increase in skilled-unskilled wage gaps in US but we do not see the wage gap reductions we expected to see in China. If anything this has actually increase in China. HO explanation is not quite satisfactory because, first we are see conflicting effects, second US trade with NIC’s constitutes only a small fraction of total U.S spending; this is too small to explain the increased gap.

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