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. What happens to the price of high-tech manufactures relative to the price of low-tech manufactures in America following trade?

Explanation / Answer

The Heckscher-Ohlin model states that countries export what they can produce easily and in huge quantities. At the same time, countries will import goods which they cannot produce so efficiently. This will help countries achieve competitive advantage by using their factors of production optimally. It will also establish trade equilibrium between the countries.
In the given case, America is a skilled labor intensive country and hence will have competitive advantage to produce high-tech manufactures. Also, America will not be able to produce low-tech manufactures efficiently. As per the Herckscher-Ohlin model, America will export high-tech manufactures and import low-tech manufactures. At the same time, given that China is an unskilled labor intensive country, it will export low-tech manufactures to America and import high-tech manufactures from America. These import and export transactions will bring trade equilibrium.
With trade, the price of high-tech manufactures relative to the price of low-tech manufactures will increase in America. This is because, America will export high-tech manufactures and reach its trade equilibrium, thereby increasing the price of the product.

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