Heckscher- Ohlin Model
1. 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?
Do a little research and then take a shot. What do you think?
Hint: these questions are all about opportunity cost; examine the opportunity cost of producing C and F in by both skilled and unskilled labor.
(a) Skilled labor is considered intensive in the industry that requires a smaller amount of skilled labor relative to unskilled labor. In this case, we can compare the unit factor requirements for computers and food. Since aSC (the unit factor requirement for skilled labor in computer production) is 1, and aSF (the unit factor requirement for skilled labor in food production) is also 1, there is an equal amount of skilled labor required in both industries. Therefore, neither industry is considered skilled labor intensive.
(b) To determine the free trade values of the nominal wages, we can use the concept of relative factor prices. The relative factor price for skilled labor is the ratio of the world price of computers to the world price of food (PC/PF), and the relative factor price for unskilled labor is the ratio of the unit factor requirements for unskilled labor in the two industries (aLC/aLF).
Here, the relative factor price for skilled labor is PC/PF = 16/12 = 4/3, and the relative factor price for unskilled labor is aLC/aLF = 2/4 = 1/2.
To find the nominal wage of skilled workers (WS), we multiply the relative factor price of skilled labor by the world price of food: WS = (4/3) * $12 = $16.
To find the nominal wage of unskilled workers (WL), we multiply the relative factor price of unskilled labor by the world price of food: WL = (1/2) * $12 = $6.
Therefore, the free trade values of the nominal wages are WS = $16 and WL = $6.
(c) When the world price of computers increases to $26, we need to recalculate the relative factor prices for skilled and unskilled labor.
The new relative factor price for skilled labor is PC/PF = 26/12 = 13/6.
The new relative factor price for unskilled labor remains the same at aLC/aLF = 1/2.
Using these relative factor prices, we can calculate the new values of WS and WL.
WS = (13/6) * $12 = $26.
WL = (1/2) * $12 = $6.
Therefore, the new values of WS and WL are WS = $26 and WL = $6.
(d) To compute the real wages of skilled and unskilled workers, we need to adjust the nominal wages for changes in the price level.
The real wage of skilled workers before the increase in the price of computers is WS/P = $16/$12 = 4/3.
The real wage of skilled workers after the increase is WS/P = $26/$12 = 13/6.
The real wage of unskilled workers before and after the increase remains the same at WL/P = $6/$12 = 1/2.
Comparing the real wages before and after the increase, we can see that the real wage of skilled workers increases from 4/3 to 13/6, indicating that skilled workers gain. The real wage of unskilled workers remains the same at 1/2, indicating that they do not gain or lose.
In summary, the increase in the price of computers benefits skilled workers, as their real wage increases, while unskilled workers do not experience any change in their real wage.