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

With trade, America will export high tech manufactures and import low tech manufactures.

China will import high tech manufactures and export low tech manufactures.

a) With the opening of trade, high-tech manufactures production will increase (for exports). As a result, the demand for skilled labor will increase, thereby increasing their wage rates. As a result of an increase in the input cost, the price of the high tech manufactured products will also increase.

b) Wage of skilled labor will increase relative to the unskilled labor. This is because of the increased demand for skilled labor to produce more high tech manufactures for export purposes.

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