1. Consider an economy consisting of two industries and two factors of production. The two industries are low-tech manufacturing (labeled as 1) and high-tech manufacturing (labeled as 2), and the two factors of production are unskilled labor (labeled as U) and skilled labor (labeled as S).
|Sales revenue||Earnings of unskilled||Earnings of skilled|
|Low-tech (industry 1)||= 500||= 250||= 250|
|High-tech (industry 2)||= 200||= 50||= 150|
Here, and are respectively prices of low-tech and high-tech goods, and are respectively output of low-tech and high-tech goods, is wage of unskilled labor and is wage of skilled labor, is population of unskilled labor in industry 1, and is population of skilled labor in industry 1, and so on.
Suppose that because of more integration to the world economy, price of the low-tech good falls by 5%, and price of the high-tech good rises by 5%. The following equations describe how changes in prices and factor rewards are related:
Here, , , , are the cost shares of each factor in each industry.
A) Calculate , , , and specify the skill-intensive industry.
B) Find changes to wages of unskilled and skilled labor. Use your numerical solution to explain the implications for real wage inequality.
2. The following table reports data on soybean yield, production, and trade for 2010-11.
Suppose that the countries listed in the table are engaged in free trade, and that soybean is land-intensive. Answer the following questions based on the assumptions and predictions of the H-O model.
Which countries are land-abundant?
In which countries do landowners benefit from free trade in soybean? In which countries do landowners lose from free trade in soybean? Explain.
3. For this question, you are supposed to study your textbook, Chapter 5, pages 96-102. If you do not own the textbook, three copies are on reserve, available for you in Parrish library.
International trade is a usual suspect as a cause behind the recent rise in wage inequality in the United States. However, many researchers do not believe that international trade is the main cause.
i. Briefly explain three reasons for why researchers believe trade is not the main cause.
ii. Briefly explain how skilled-biased technological change is a more believable cause behind the rising wage inequality.
Type your answer and limit it to a total of less than 300 words.