International Economics
Question 1
The decision to shift towards free trade with Mexico has increased trade in that country, and this has raised investor confidence. This has in turn added the capital inflows to the country, increasing the demand for skilled labor. This follows the Stolper-Samuelson theorem, which asserts that an increase in the price of a capital-intensive good will increase the return to capital and decrease the return of labor. This decision means that the differences in wages between the skilled and the unskilled workers will continue to widen. The real wages of skilled workers in Mexico will increase and the real wages of the unskilled workers will decrease. Mexico has more unskilled labors than the US or Canada, but free trade will change this. The real wages of unskilled workers in Canada and the US will decrease and the real wages of skilled workers will continue to increase.
Question 2
The real wages earned by the laborers will equal the real rental rate that is earned by the landowners because of the free trade. This only holds true in perfect competition, and if the countries engaging in free trade have the same level of production technology. Each country will move goods at the same prices. If the countries engaging in free trade have different prices of goods, then this will have an effect on the marginal productivity, and the real wages of the laborers will not equal the real rental wages of the landowners.
Question 3
America cannot afford to cut international trade. International trade provides a market for the US goods. Cutting off international trade will cause the other countries to retaliate. This will mean that the US will not have a market for its locally produced goods. Although America has a high population, it still needs other markets so that it can sell its goods. This provides more jobs for the manufacturing sector. What the country needs is to create a balance, by ensuring that the imports are not in excess. It could do this by imposing tariffs or import quotas, which will decrease the quantity of goods imported.
Question 4
Increase in the price of computers will lead to an increase in the production of computers because capital is specific to computers. This will lead to decrease in the production of wheat as more labor moves towards wheat production. If the factors are immobile, then the increased production will not have any effect on the production of wheat.
Question 5
Total input shares of labor in each dollar of cloth output:
= 1.00 / 0.50 = 2
There are a total of two input shares of labor for every dollar of cloth output.
Total input shares of labor in each dollar of cloth output
= 1.00 / .20 = 5 meaning there is five input shares of capital for every dollar of cloth.
In the case where the total input share of labor is higher than total input share of capital, it is true that such a country is labor abundant and capital scarce. This is explained by the fact that labor input is exceeding the capital input, meaning the no of laborers available within the country are more than the capital that can be ejected.
Question 6
Japan is abundant in skilled labor, and it will therefore export skilled labor-intensive goods such as automobiles. It will export iron and steel assuming that these require skilled labor. Japan is land scarce in terms of land, and the data on food, metal ores, and crude petroleum products is therefore consistent with the Heckscher-Ohlin model. However, data is inconsistent on pharmaceuticals and aircraft manufacturing since this requires both skilled and unskilled labor. The country will import clothing and accessories because this requires unskilled labor.
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