Assume the Heckscher-Ohlin model to answer question 3.The Heckscher-Ohlin model assumes two factors of production.In the example given in class, the two factors are labor and capital.In this question the two factors are skilled labor (L^S) and unskilled labor (L^U).The two goods are textiles, which are intensive in unskilled labor, and software, which is intensive in skilled labor.

a.Sketch the labor demand curves for both industries, the economy wide labor demand curve (RD) and the labor supply curve.The horizontal axis is the relative supply of skilled labor (L^S/L^U) and the vertical axis is the relative wage of skilled labor (w^S/w^U).This is not a numerical problem, but you should show what each curve looks like and the position of each demand curve relative to the others.

b.Assume that the home country is abundant in skilled labor.Which good will the home country export?

c.Use your graph in part a to show the effect of trade on the relative wage of skilled labor.