Please help on the following question
2. (Heckscher- Ohlin Model) Suppose that Home produces computers (C) and Food (F) using skilled labour (S) and unskilled labour (L). The unit factor requirements for each industry are:
aSC = 1 aSF = 1
aLC = 2 aLF = 4
(a) What good is skilled labour intensive?
(b) Suppose that the world price of computers PC is $16 and the world price of food PF is $12. Assuming that Home produces both goods what are the free trade values of the nominal wage of skilled workers WS and the nominal wage of unskilled workers WL?
(c) Suppose the world price of computers increases to $26. What are the new values of WS and WL?
(d) Compute the real wages of skilled workers and unskilled workers before and after the increase in the price of computers. Which factor gains and which loses?
To answer these questions, we need to understand the Heckscher-Ohlin Model and how to determine the factor-intensity of each good, as well as the effects of changes in prices on factor wages.
(a) To determine what good is skilled labor intensive, we look at the ratio of skilled labor (S) to unskilled labor (L) in the unit factor requirements. If the ratio is higher for one good compared to the other, then that good is skilled labor intensive.
In this case, the ratio for computers is (1 skilled labor) / (2 unskilled labor) = 0.5, while the ratio for food is (1 skilled labor) / (4 unskilled labor) = 0.25. Since the ratio is higher for computers (0.5 > 0.25), computers are skilled labor intensive.
(b) To determine the free trade values of the nominal wages of skilled workers (WS) and unskilled workers (WL), we compare the world prices of computers (PC) and food (PF) with the unit factor requirements.
The relative price of computers to food in terms of skilled labor is PC/PF = WS/WL. Given that PC = $16 and PF = $12, we can set up the equation as:
16/12 = WS/WL
Simplifying this equation, we get:
4/3 = WS/WL
Therefore, the ratio of the nominal wage of skilled workers to unskilled workers is 4/3.
(c) If the world price of computers increases to $26, we need to recalculate the new values of WS and WL. We use the same equation as before:
26/12 = WS/WL
Simplifying this equation, we get:
13/6 = WS/WL
Therefore, the new ratio of the nominal wage of skilled workers to unskilled workers is 13/6.
(d) To compute the real wages of skilled workers and unskilled workers before and after the increase in the price of computers, we need to adjust the nominal wages for changes in prices. The real wage is the nominal wage divided by the price level.
Before the increase in the price of computers, the real wage for skilled workers (WS_real) is WS/PC = WS/16, and the real wage for unskilled workers (WL_real) is WL/PF = WL/12.
After the increase in the price of computers, the new real wage for skilled workers (WS_real_new) is WS/PC_new = WS/26, and the new real wage for unskilled workers (WL_real_new) is WL/PF = WL/12.
To determine which factor gains and which loses, we compare the change in real wages. If the real wage increases, the factor gains, and if the real wage decreases, the factor loses.
Comparing the real wages before and after the increase in the price of computers, we can evaluate which factor gains and loses based on whether their real wage increases or decreases.
Note: The calculations require actual values for WS and WL, which are not provided in the given information.